Cannabis: Do The Regular Rules Apply When Investing? You can now recreationally grow it, smoke it, vape it, tincture it, and eat it. And probably ‘verb it’ in a few other ways I’m not up to speed on. But do you want to invest in it? As of January 2014, regulations have eased here in Colorado (and taxes have been added) to allow for full retail marijuana legalization for adults. However investing in the cannabis industry comes with its restrictions. And the same goes for those newly legal verbs surrounding the use of cannabis I mention above. But there’s no denying this industry is burgeoning as Colorado rolls out its recent legal changes to the cultivation, sale, use, and possession of cannabis.
With this new industry there are new opportunities for investors. When considering cannabis, do traditional rules of investing apply? What does the opportunity look like?
Let’s establish some ground rules. Warren Buffet will tell you the first rule of investing is to never lose money. There’s more to not losing money than just not wanting to (especially when analyzing the complicated web of cannabis regulations) so these are a few more guidelines to follow when looking for value:
- If you can’t explain why you’re making an investment, don’t invest.
- Get to know what you’re investing in (is this a technology or company you believe in?) and then consider the tax benefits and implications (don’t let tax be a main driver).
- There’s value in a track record but decisions should not be made looking backward.
- Don’t be fooled by the ‘greater fool theory’ because this one relies on someone else also playing that game.
- Investments are not one size fits all.
- Investing isn’t emotional and don’t be afraid to admit you’ve made a bad decision. Sometimes it’s best to cut your losses and move on.
- Don’t pay fees you don’t have to.
- There’s no such thing as market timing.
- Know your risk tolerance (and know it well).
- Be patient.
Until January 2014, if you wanted to invest in cannabis, outside of medical cultivation and sales, your options were limited to a handful of small-cap marijuana stocks, commercial real estate, and a few niche opportunistic deals. Now the market is expanding.
The direct cultivation and sale of cannabis is restricted to Colorado residents of two years (as of the application date for a license, which varies by county). But you don’t have to grow or sell to participate in the industry. There are (and there will likely be more) a whole host of ancillary businesses to consider: packaging, vaporizers and e-cigarettes, plant ID tacking systems, security, insurance, software and technology, horticulture products, marketing.
As of November 2013, ArcView Market Research tells us a few things about the market:
- It’s big: $1.53B is the estimated size of US legal marijuana market;
- it’s growing: $2.57B is the projected size by the end of 2014;
- and it’ll likely grow even more: the market is projected to be ~$10.2B in 5 years.
- Plus 21 states currently have legalized medical marijuana; and
- 14 states are predicted to adopt Adult Use in the coming years.
There will (of course) be specific risks related to each investment. But what are some considerations for the overall market? What will investment opportunities, returns, and risks look like as this industry’s sectors take shape? What is the growth potential within Colorado? How will banks and bankers get involved (or not)? Will other states follow suit?
By Catherine Compitello. Catherine is an alternative investment marketing specialist turned entrepreneur. She founded The Farm Above, a sustainable rooftop farming business. New to Boulder from Wall St., she is excited to collaborate with other impact entrepreneurs in the community.