Investing in the marijuana industry can have intoxicating effects.
Unless you’re an experienced trader or speculator who’s only investing money they’re willing to part with, you’ll likely go through an emotional rollercoaster ride the moment you purchase a considerable amount of shares for your portfolio.
The staggering amounts of volatility that pot stocks exhibit will probably either cause you to either be in a state of euphoria or a state of panic depending on the short-term movements of day-to-day stock price movements. The magnitude of the up or down movements are ridiculously high; as such, it shouldn’t come as a surprise if shares of all pot stocks were to shed half their value over the course of a few days.
This is entirely possible, and there are many unforeseen events that could trigger just such a sudden implosion across the broader marijuana market. Even if you have a long-term thesis that you believe is sound, your investment could be derailed because of a single event.
On the flip side, an event could cause you to double, triple or even quadruple up over the course of just a few months, as we’ve seen in the latter part of last year. There’s no way to predict the sequence of events that will rear their heads, so you’re really spinning a roulette table over the short-term. Unfortunately for those who want to be in the industry for the long-term, such short-term events could end up squeezing you out of your position should an unforeseen series of negative events cause shares to drop by a percentage amount below your threshold of pain.
As you’d imagine, a huge swing in emotions probably isn’t good for your health, especially since the stakes have been raised with nationwide legalization just a few months away. There are strategies that can minimize your anxiety when investing in pot stocks, however, and it doesn’t involve tuning out the latest news from the nascent industry. As an investor in pot stocks, you’ll want to stay well-informed, as the average investor’s thesis is likely to change, not only a year-over-year basis, but also on a week-to-week or even day-to-day basis! You’ll need to be in the know so you can make an informed decision in order to protect your principal from going up in smoke in a hurry.
A “safer” way to invest in marijuana
Enter Horizons Medical Marijuana Life Sciences ETF (TSX:HMMJ), a diversified portfolio that will give you exposure to everything marijuana not only to producers like Canopy Growth Corp. (TSX:WEED), but also to foreign biopharmaceutical firms like GW Pharmaceuticals PLC (NASDAQ:GWPH), which develops treatments and products derived from cannabis. You’re also getting exposure to hydroponics for do-it-yourself pot growers, which may act as a slight hedge against producers, as I believe the grow-it-yourself economy may satisfy the demand for cannabis in a post-legalization environment.
Further, you will also stand to benefit as the industry continues to consolidate. With the ETF, you’ll gain exposure to some of the smaller pot producers that aren’t part of the Big Three Canadian producers. MedReleaf Corp. (TSX:LEAF) shares popped following the news that Aurora Cannabis Inc. (TSX:ACB) scooped up the company.
And let’s not forget about the elimination of single stock risk. Although there’s a high degree of systematic risk across all pot stocks, many individual stocks had their own unique problems that caused deeper corrections. Think Canopy’s Mettrum scandal over a year ago or fears over the delisting of Aphria stock over its possession of U.S. assets a few months ago.
With a diversified basket of all things pot, you’ll have fewer things to worry about in an industry that’s full of investor angst.
Of course, there’s no way to completely eliminate the sky-high amounts of risk from investing in marijuana. And you may surrender next-level gains from a single stand-out winner. However, given that there’s no way of telling which developments are coming for a given stock, many investors may find comfort in the fact that they can focus on industry-wide developments instead of jumping in and out of various pot stocks depending on what’s deemed hot at a given point in time.
Stay hungry. Stay Foolish.
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Fool contributor Joey Frenette has no position in any of the stocks mentioned.