If there’s one thing that the recent issues surrounding CannTrust Holdings Inc (TSX:TRST)(NYSE:CTST) reminded us about, it’s just how risky investing can be. However, there are three important lessons from the CannTrust scandal that we can learn from and apply to all investments to help minimize losses in the future:
Not to hold on to losers
CannTrust lost more than half of its value in just a few weeks time. However, investors that sold early could have salvaged a lot more of their initial investments. Holding on only prolonged the inevitable, with only the most committed CannTrust investors, or perhaps speculators, still owning the stock today.
The challenge, of course, is knowing that the stock won’t bounce back in price and that it’s only destined to fall even further down. That’s difficult to know, but when the company already had a big drop in price just on its earnings results, that could have been a sign that the stock’s high volatility made it more of a risk than some of its peers.
Having patience is important
Many people have earned significant returns from owning cannabis stocks. However, many more have lost a lot of money from doing so as well. In order to minimize risk, investors would be better off waiting to invest in a company that has established more of a brand and that’s also profitable as well.
The danger with up-and-coming companies, whether they’re IPOs or cannabis stocks, is that the temptation to make the numbers and produce what investors want to see can create a temptation to cut corners. And with so much competition in the cannabis industry, CannTrust was trying to make a name for itself – and it did, with significant sales and market share.
As we know now, it came at a big cost. That’s why investing in new companies or those in emerging industries like cannabis, can often be very risky buys. While some stocks may turn out to be very successful, others may not. Time can help reduce that risk, by waiting for a company to develop more of a track record and to prove to investors that it has good governance, controls and results.
Leadership shouldn’t be overlooked
When the CannTrust scandal broke, then-CEO Peter Aceto was nowhere to be found and did not take the issues head-on and face the scandal. Instead, investors were told that investigations would be taken to uncover the ‘root causes’ of the violations. That alone should have been a big red flag, as it suggested that the CEO didn’t know what was going on within his own company. That was especially concerning since it involved producing a lot more cannabis, which should have been easy to notice.
Before deciding to buy a stock, it’s important to at least have a quick look at who the CEO of a company is. It can give you an insight into how well the company is run. While it may not prevent you from being able to spot a bad leader, you can minimize your investment risk by choosing to invest in stocks run by credible, well-respected CEOs that have strong track records behind them.
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Fool contributor David Jagielski has no position in any of the stocks mentioned.