How much should I invest in marijuana stocks? – The madman

Many investors are looking at marijuana stocks for the first time, given the significant gains in recent months. Even though the cannabis industry has gradually gained momentum in recent years, key events such as the pending legalization of recreational marijuana products in Canada have drawn attention to new facets of the market that most investors did not know before.

Whenever a new trend of promising investment is emerging, it is always tempting to use it in an attempt to enrich it quickly. Some people have done so by investing a large portion of their capital investment in marijuana stocks. It is true that many aggressive investors have already seen their holdings in cannabis companies gain value, apparently validating this approach. Still, the risks associated with the marijuana industry warrant a more cautious approach for long-term investors. Here are some things to consider to help you determine how much you should invest in marijuana stocks.

What can you afford to lose?

Whenever you are dealing with a speculative investment, the first thing to ask is how much you can afford to lose. In the early 2000s, while investors were very familiar with Internet-related actions, new industries are extremely competitive and, over time, the sheer number of start-ups looking for a fortune vanishes in favor of a handful survivors. For every internet giant like Amazon.com this helped to break through the technological chaos and prosper, hundreds of now unknown Internet companies burst and resulted in total losses for their shareholders.

The same can be said for the cannabis industry, where thousands of small businesses compete for lucrative supply contracts, implement innovative farming techniques and find better ways to market their products to farmers. potential customers. Many small marijuana companies will be completely destroyed along the way, and it is even possible that some of the most prominent players in the cannabis sector will suffer heavy losses if things do not go as planned. If you invest more than you want to lose, you will be vulnerable to a major financial disruption in your investment strategy, making recovery difficult.

Direct or indirect investment in marijuana

Everyone does not take the same approach to investing in the marijuana industry. Some have focused on relatively young firms directly involved in cannabis cultivation and the production of cannabis-related products, and these actions have been extremely volatile. Tilray (NASDAQ: TLRY) This is the most obvious example, as its stock float has seen its prices fluctuate from $ 20 to $ 300 in the last three months since its initial public offering. The massive initiatives of Tilray have little to do with basic business performance and more to cope with the dearth of attractive investment options for those seeking direct exposure to marijuana production and distribution.

Due to the dynamics of supply and demand for the shares of companies that are directly involved in marijuana currently, the most cautious investors should only devote to them a small portion of their overall portfolio. # 39; investment. Many investors maintain a long-term core portfolio consisting of stable investments representing between 90% and 95% of their investable assets, then use the remaining 5% to 10% and use it for more speculative investments. Obviously, this reduces the potential return, but it also ensures that even a total loss will not devastate your financial future.

However, if you have a broader view of the cannabis industry, it may be prudent to invest more in companies that are only indirectly involved in marijuana. For example, some have opted for investment in Constellation Brands (NYSE: STZ) because of his massive investment in the cannabis producer Cover growth (NYSE: CGC). Constellation has everything to gain if Canopy takes off, but its highly profitable beer and liquor business also makes up for potential losses if marijuana does not end up being as lucrative as expected. Similarly, many have speculated about other links and collaborations of this type between cannabis companies and mature giants of consumer goods.

Investing indirectly in marijuana through the broader pool of consumer stocks that could benefit if the cannabis market took off could go well beyond the 5% to 10% allocation discussed above. above without necessarily being cautious. The amount you invest depends exactly on your vision of each company's core consumption activities. However, the fact that cannabis only partially contributes to their performance makes them less vulnerable to the risks that small marijuana growers must bear.

Be smart with marijuana stocks

It is impossible to know if the marijuana stocks have already reached their peak or still have a lot to do. The best way to protect your bets while continuing to participate in any future growth of the cannabis industry is to avoid over-extending the allocation to oversized players. That way, you will still be able to make money if marijuana does well without fear of putting yourself in real financial trouble if you make a decision that turns out to be a bad decision.

John Mackey, CEO of Whole Foods Market, an affiliate of Amazon, is a board member of The Motley Fool. Dan Caplinger has no position in the mentioned actions. The Motley Fool owns shares and recommends Amazon. Motley Fool has a disclosure policy.