The Safest Way to Invest in the Cannabis Industry

Forget Canopy Growth Corp. (TSX:WEED)! Here’s the safest way to invest in the extremely risky marijuana market.

| More on:

Cannabis investing is absurdly risky, and as pot stocks continue on their exponential upward surge, investors really need to take every precaution to protect themselves from potential events that could cause their invested principle to go up in a puff of smoke.

There’s no question that the Canadian cannabis industry is changing at a rampant rate. It seems like every week there are new developments that could be drivers of euphoria or potential causes for concern. The rapidly emerging cannabis industry requires investors to be “in the know,” not just on a month-to-month basis, but on a day-to-day basis, as the huge amount of uncertainty and volatility could quickly derail your investment over a very short time span.

A bull thesis could take a 360-degree turn in an instant, so it’s important that cannabis investors know how to react accordingly in response to unforeseen events. It’s important to tell the difference between noise and an event that could obliterate your original thesis. Whatever your thesis is for the cannabis sector, you’ll likely need to make modifications as you go along and ask yourself some really difficult questions.

While there’s no way to eliminate industry-wide risk, there is a way to cut down on single-stock risk by investing in Horizons Medical Marijuana Life Sciences Index ETF (TSX:HMMJ), which provides investors with exposure across the broad marijuana industry, not just with producers, but with firms that’ll benefit indirectly from the maturation of the industry over the years. Biopharmaceutical companies dealing with cannabinoids like GW Pharmaceuticals PLC and lawn/garden firms like Scotts Miracle-Gro Company are also thrown into the mix.

Why not invest in individual marijuana stocks?

The Big Four Canadian cannabis producers — Canopy Growth Corp. (TSX:WEED), Aphria Inc. (TSX:APH), Aurora Cannabis Inc. (TSX:ACB), and MedReleaf Corp. (TSX:LEAF) — are the leaders as of right now, but over the next few years, it’s possible that none of these companies could be the dominant force in the global marijuana market when all is said and done.

At this point, the market leader of the future may not even be known of yet, and as Health Canada grants more licences to prospective producers, the Big Four producers may lose ground to an up-and-comer that’s better equipped to scale up at a quicker rate. Big tobacco and alcohol companies may be waiting for the dust to settle before they make a jump into the nascent marijuana industry.

Also, if you simply own the broader basket of pot stocks, you won’t have to worry about which company will fall because of company-specific problems, like Canopy’s tainted marijuana scandal, Aphria’s ownership of illegal U.S. assets, or Aurora’s shareholder dilution.

Bottom line

There’s just way too much uncertainty following the entire cannabis market. And if you’re not willing to trade in and out of individual pot stocks on a regular basis, there’s no shame in owning the broader basket of pot stocks. At these levels, however, I wouldn’t touch any cannabis-related securities with a barge pole, because I think a correction is highly probable in 2018.

Stay hungry. Stay Foolish.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any of the stocks mentioned.

More on Investing

Target. Stand out from the crowd

2 Canadian Stocks I’m Buying Lots of This Year

I’m looking to snatch up exciting Canadian stocks like VieMed Healthcare Inc. (TSX:VMD) throughout 2023.

Read more »

grow money, wealth build
Dividend Stocks

Got $3,000? 3 TSX Growth Stocks to Buy in January 2023

Top TSX growth stocks that look appealing for 2023.

Read more »

woman data analyze
Dividend Stocks

Need Passive Income? Turn $15,000 Into $851 Annually

This passive-income stock is already climbing higher, up 16% in the last three months! Yet it's still valuable, so you…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

Retirees: 3 Reliable Canadian Dividend Stocks to Buy Now for Passive Income

Top TSX dividend stocks now appear oversold.

Read more »

A red umbrella stands higher than a crowd of black umbrellas.

2 TSX Stocks Safer for Investing in a Recession

These consumer companies will likely beat the broader market averages amid a recession. These stocks offer stability, income, and consistent…

Read more »

Dividend Stocks

For $100 in Passive Income Each Month, Buy 1,500 Shares of This REIT

REITs such as Northwest Healthcare can enable investors create a passive-income stream as well as benefit from capital gains.

Read more »

A colourful firework display
Dividend Stocks

2 Canadian Growth Stocks (With Dividends) to Start 2023 With a Bang

Here are two of the best dividend-paying Canadian growth stocks you can invest in at the start of 2023 and…

Read more »

sale discount best price
Dividend Stocks

4 Insanely Cheap Canadian Stocks to Buy for Passive Income

The recent bear market has created some incredible bargains, especially for those looking for passive income. Here are four cheap…

Read more »