This year I have been asked by my family, friends, clients, and colleagues about buying pot. It feels a little like translating a landscape inside a Salvador Dali painting. With the legalization of Marijuana knocking on our door, we are getting a lot of inquiries on how to invest in this so called blue ocean, or in this case, green field.
To try and understand this new market I went out and did some research learning where we stand with legalization in the political environment, how to trade in this market, what companies will be best positioned for success, and going to a Phish concert to talk first hand with a farmer from Humboldt County, California.
For starters, Marijuana is still illegal at the Federal level. The legalization has all taken place at the state level. This is important for investors because stock exchanges are federally regulated. Under our current administration, U.S. Attorney General Jeff Sessions has voiced opposition to legalization. It is therefore likely that Marijuana will continue to remain illegal at the federal level until we have an administration change.
Currently there are no Marijuana ETFs or Mutual Funds traded on U.S. exchanges. If a fund did go through the process of becoming eligible to trade in the U.S., it runs the risk of being delisted from exchanges. This would be a costly endeavor for a fund company to risk losing their listing status. To invest in a Marijuana fund, an investor would have to look outside the U.S.
Investing in the plants themselves poses a lot of challenges, however there are other complementary industries that could potentially benefit. Some areas of speculation would include tobacco companies with processing and distribution facilities. Fertilizer and hydroponic supply companies can also turn on Marijuana specific lines. Real estate which is leased to growers is also available. One thing all these sectors have in common is that they all will be able to expand their business model with the legalization of Marijuana. However, if the legalization trend reverses, they all have sound business models or assets to fall back on.
Lastly, I was able to talk first hand with a Marijuana farmer from Humboldt County, California. Many revere Humboldt County as the New York Bagel, Philly Cheesesteak, and Chicago Deep Dish for Marijuana farming. In fact, cravings for all three, at once, will likely occur after sampling the Humboldt product.
I asked if there was room to put a team of investors together to buy land, grow crops, and distribute. All around him land is being bought, excavated, and cultivated by prospectors looking to cash in. It turns out basic economic functions of supply and demand apply to this industry as well. In the past few years product supply has skyrocketed to meet a now legal demand cutting the price of his crop in half. Because his infrastructure is in place, he can continue to operate profitably. His startup costs were covered in a much more profitable time.
I asked about the future. Demand won’t disappear and there will be appetites for different styles and blends. For small farmers like him, it may become a micro-brew venture. Big business has already started to drive down cost and profit through scale and logistics.
Choosing investments to complete a portfolio is unique to each individual investor. As always it is encouraged to work with a CERTFIED FINANCIAL PLANNERTM Professional when targeting an appropriate asset mix. What a long strange trip writing this article has been.
*Investing in alternative investments may not be suitable for all investors and involves special risks, such as risk associated with leveraging the investment, adverse market forces, regulatory changes, and illiquidity. There is no assurance that the investment objective will be attained. Investments are subject to risk, including the loss of principal. Past performance is no guarantee of future results. This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.