Marijuana Stocks- Should you “Buy the Rumour and Sell the News?”

The Cannabis Act (C-45) has passed, so as of October 17, 2018 Canadians will be able to legally use recreational Marijuana. Many see this budding industry as a huge opportunity both for investment and also a potentially lucrative career. On August 13 Mark Ting discussed the marijuana industry with CBC’s “on the Coast” host Gloria Macarenko.  Below are the highlights of that interview.

Would you or have you ever invested in Marijuana companies?

Yes, I have a small position in Marijuana stocks, just about 3% of my overall portfolio.  I think there is a future in marijuana, but it is still early days and the risk is high. That’s why I keep my exposure to this sector relatively low.  I worry for those people who are overly enthusiastic about marijuana’s future, because they may be putting all their eggs in one basket.  Perhaps they are concentrated in marijuana stocks and don’t have a contingency plan.  If things don’t go their way, they will end up paying (literally) a “high” price. It is important that any investment be part of a well-diversified portfolio.

 What advice would you give to someone who is considering investing in Marijuana?

Marijuana is a growth story, which means that investors accept risk.  They must be willing to overpay for stock now in exchange for future potential and price appreciation, but with the risk that the anticipated growth is not realized and the price falls. Currently most marijuana companies, including the bigger ones like Canopy or Aurora, lose millions of dollars every year.  Still many people continue to invest in marijuana as they feel that the sector will flourish once it becomes legal on October 17^th.  These enthusiastic investors anticipate there will be a rush of buyers prior to Oct 17^th and the added demand will push stock prices even higher. Personally, I’m less convinced. It wouldn’t surprise me if marijuana stocks underperformed in the days or weeks following Oct 17^th.

What makes you think that?

There is an investment adage which goes “Buy the rumour. Sell the news.” This adage is used by veteran investors who want to take advantage of all the hype, mania and exuberant emotions often displayed by novice investors.

Over the last year, both novice and veteran investors started to take notice of the marijuana industry.   When various US states and Canada started talking about legalizing recreational marijuana, the stock prices began to move up.  Then the main stream media also took notice and started running pro-marijuana stories.  For Canada the “big news” was Justin Trudeau’s announcement he planned to legalize the recreational use marijuana by the fall of 2018.

It is at this point that the actions of veteran and novice investors often differ.  Novices see the “news” as a potentially good rumour, so they start buying stocks. Veterans do the opposite, they “sell the news” to take advantage of all the added buying momentum. Veterans lock in profits, wait for the momentum to die down before (hopefully) buying back the same stocks at much lower prices.     If enough investors “sell the news” I would expect marijuana stock prices to drop rather than go higher after Oct 17^th.

Besides investing in the stocks, how else can people take advantage of the marijuana industry?

It’s a new and growing industry which will need all sorts of workers in the future—growers, harvesters, maintenance people, marketers, retailers, drivers, warehouse people etc.   Many of the jobs related to the marijuana industry are well paid.  You can do a quick search on “Indeed.com” or “Cannabis-at-work” and all sorts of jobs will pop up.  Many are “career” type jobs paying $50-$100K/year.

People say that you should try to get a job in a field you are passionate about.  Many young people are passionate about marijuana!  Also, I hear many companies provide “on the job training”,  which is great opportunity for people who chose not to pursue post secondary education.

If your son or daughter graduated high school and said they wanted to pursue a career in the marijuana industry, would you okay with that?

If that’s what they want to do and are passionate about it, I’d say “fine”.  I’d have questions of course—the first one being “Why are they so passionate about marijuana?”  I’d be happy if my children had a career goal, particularly if it is in an industry that has a bright future.  I’d be proud if my kid’s wanted to pursue a career in AI (Artificial Intelligence), robotics, engineering or medicine —and I’d add the marijuana industry to that list. They can try it out, see if they like it, maybe get some post secondary education to advance their career or, if it isn’t for them, they can pivot and do something else.

With Marijuana becoming legal in just a couple of months, would you suggest people pick up some stocks now?

If you want to take a small position and you have a high risk-tolerance, I wouldn’t be opposed to people dipping their toe into the marijuana sector at today’s prices.  The real marijuana buying frenzy happened last January.  It has cooled off since and the marijuana index of stocks is down about 17% from the January 2018 peak.   I’m not sure if now is a great time to buy, but it is 17% cheaper than it was just 7 months ago.

Thanks for reading Mark Ting @MarkTingCFP