How to Manage Risk When Investing in Cannabis


Jason Mueller

September 6th, 2017

Policy


Risk in investing is inevitable: in fact, it can be said that the only way to earn through investment is by taking risk. Despite the inherent risk of the market, investors have long touted risk management as the key behind how they keep their losses small and their profits large. Risk management plays a factor in all investment, therefore, it plays an essential part in investing in the cannabis industry.

Amounting to $6.7 billion dollars of sales in 2016 and growing, the cannabis industry seems like a no-lose investment to the inexperienced investor – luckily for those reading, this article will describe some ways to mitigate risks specifically in the cannabis industry.  Plenty of this knowledge is cross-applicable to investing in general, but when analyzing the cannabis industry separately from the rest of the market, there are some aspects of risk that are unique as well.  Read on to discover the top risk managment techniques when investing in the cannabis industry.

Diversification

First and foremost when speaking of risk management in investing, diversification must be discussed first.  Diversification means investing across many mediums and companies for the sake of portfolio stability.  For example, many people understand that Apple (APPL) is a successful company: the difference between diversified investment into Apple versus an inexperienced investor simply “buying Apple stock” is that the diversified portfolio will not only include Apple, it would also include competing tech companies and companies outside of the tech sector. This helps offset losses should Apple stock go down, while also providing the long-term ability to profit by holding the blue-chip APPL stock through slight recessionary events.

In terms of cannabis, diversification could not be more important.  A single, publicly-traded company in the cannabis industry always has the potential of being devastated by a Federal crackdown on cannabis law.  Though many States have State-sponsored legislation legalizing cannabis, the Federal illegality of the plant under the CSA means that any and all canna-businesses are at greater risk of sudden shutdown than companies without legal ambiguity.  While this is possible, it’s very unlikely that the Federal government will shut down medical or recreational cannabis in States that have ushered them in – simply by diversifying your portfolio, you practically eliminate the risk that your portfolio will lose all value in the case of a major Federal move against cannabis.  Think of all of the companies in the cannabis industry that don’t produce or sell cannabis:  grinder companies, glass blowing companies, and other cannabis accessory providers are great to diversify with as they run no risk of being raided by the Feds.

Fundamentals

Another incredibly powerful way to manage risk when dealing in the cannabis industry is by investing in well-established companies that show good fundamental indicators.

While many companies may seem well-established, proper risk management when investing in them dictates that investors should review each company’s financial stability by looking at their fundamental indicators.  Many companies explode onto the scene to unprecedented growth, only to dwindle and fold within a matter of months.  It is essential to research companies that you plan on investing in – look at their profit/ loss ratio and make sure that they are solvent, as well as other fundamentals like trading volume, historic highs and lows, and more.

Also be sure to look into the management teams of companies that you hope to invest in – experience and education go a long way, and if you blindly invest in a canna-company, you run the risk that company management will run their company into the ground, thus dissolving your investment fund into a bitter memory.  Always look at fundamental indicators for long-term investing.  If you plan on “buying and holding”, it is extraordinarily important to know that your investment will grow as the company grows.

Risk is an inherent evil of investment, but in the cannabis industry, a little risk can have a big reward.

Jason Mueller

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