The Smart Way to Invest in Marijuana Stocks – Motley's Fool

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As of Wednesday, October 17, 2018, recreational marijuana sales are underway in adults at licensed clinics across Canada. This makes our northern neighbor the first industrialized country in the world to have given the green light to the hobby pot and the second country in the world behind Uruguay to do so.

What does legalization mean for the legal cannabis industry? Although estimates tend to vary widely, Wall Street seems to be looking for additional annual sales of $ 5 billion or more from domestic demand and exports once everything is in order. This exceptionally fast sales growth should translate into substantial profits for the sector.

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Invest in pot stocks with ease

But as investors, we also know that not all marijuana stocks will succeed. Some clear winners will emerge, as well as monumental failures. We also know that, given the euphoria surrounding legalization in Canada after nine decades of prohibition of adult use, volatility will be high (pun intended). This makes investing in the cannabis landscape particularly risky.

So investors need to make a choice: participate in a booming and high-growth industry, or stay out of the way to avoid volatility and the possibility of a loss?

The good news, however, is that there is a smart way to invest in marijuana stocks. As long as you approach your investments with the following four factors in mind, you must be ready to succeed in the long run.

Source of the image: Getty Images.

1. think long term

The most important suggestion I can make about investment in the cannabis industry is that one has to be patient. Although marijuana stocks have generated incredible returns since the beginning of 2016, all future investments are becoming increasingly urgent and the cannabis industry will be no different.

For example, it will be years before the pot industry has fully grown to meet domestic and foreign needs. A rough estimate from you really suggests that Canadian producers could produce 3 million kilograms (or more) a year by the end of 2020. Currently, however, most producers have between 0% and 30% % of the maximum production potential. .

Take Aurora Cannabis (NYSE: ACB), which is expected to produce at least 570,000 kilograms of weeds per year at full capacity. But by the end of the 2018 calendar, there will only be 100,000 pounds per year. Aurora Cannabis has undertaken many large and expensive projects, such as its Aurora Sun project in Medicine Hat, Alberta, which will take time to materialize and intensify. Although Aurora Cannabis may have a competitive advantage as Canada's largest producer, it will take a long time to reach peak production.

I can not emphasize enough the importance of thinking long-term when buying marijuana stocks.

Source of the image: Getty Images.

2. Diversify your assets

Second, it would be a really A smart idea to diversify your holdings beyond one or two stocks. Indeed, it is far too early to say which stocks of cannabis will come out winners and which others will not be. Some long-term winners are enough, and your wallet could see a lot of green.

How should you diversify? One option is simply to invest in several marijuana stocks. This option is particularly suitable for investors who wish to devote time to research and who wish to keep abreast of the latest industry news. Again, this does not mean that you focus solely on the short term, but it does mean that you will need to keep an eye on news and events that may change your business for the pot stocks you own.

The other option is to take the path of Exchange Traded Funds (ETFs). Buy an ETF as Horizons Marijuana Life Sciences ETF (NASDAQOTH: HMLSF) give an investor access to a basket of cannabis stocks with unique security. Horizons Marijuana Life Sciences ETF currently holds 49 different marijuana shares in the fund and has a reasonable net expense ratio of 0.75%. In addition, the Horizons Marijuana Life Sciences ETF holds companies that are both directly and indirectly in contact with the cannabis plant, thus constituting a truly diversified asset.

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3. Enter the pond rather than jump

Whatever the sector, it is always good to start slowly in the pond rather than start creating new jobs.

As mentioned, nothing says just which marijuana stocks will become long-term winners and which ones will not. History also shows that the financial bubble tends to burst sooner than expected. Whether it's the Internet, decoding the human genome, 3D printing or blockchain technology, the bubble eventually burst. The same could be true for marijuana stocks.

The best way to protect your wallet in the event of the bubble burst is to buy several times in these actions. I like to consider myself a nibbler. Between 2012 and 2014, I bought my biggest current stake (not a marijuana stock) on 26 different occasions. Even if that does not mean that you should do the same, it would probably be a good idea to buy cannabis stocks at regular intervals rather than dive in and hope for the best.

Source of the image: Getty Images.

4. Do not forget the auxiliary players

Finally, do not forget the indirect actors of the marijuana sector. In other words, keep in mind that there is a life beyond the pots producers.

Calling on indirect players could be a smart way to reduce volatility and strengthen your portfolio, as many of these ancillary actions are also aimed at companies other than cannabis. For example, Scotts Miracle-Gro (NYSE: SMG) hopes to benefit from the growth of cannabis for medical purposes in the United States, and perhaps even internationally, through its subsidiary Hawthorne Gardening. Hawthorne's goal is to provide lighting, soil, nutrient and hydroponic solutions that will help improve crop yields for growers. This fast-growing company could be a good needle remover for Scotts Miracle-Gro.

But the fact is that Hawthorne was only responsible for 11% of Scotts' 2017 annual sales. The rest comes from its main activity in the fields of lawn and garden. Even though the marijuana industry's bottom was falling apart, Scotts could rely on its core business to generate substantial profits.

There are many ancillary stocks to consider that can provide this protection to investors.

While investing in marijuana carries inherent risks, there are smart ways to mitigate that risk and get your feet wet as the run to green rushes.