Warning: Investing in cannabis may be dangerous for your portfolio

‘Researchers tested a new form of medical marijuana that treats pain but doesn’t get the user high, prompting patients who need medical marijuana to declare, ‘Thank you?’” – Jimmy Fallon.

In what has become somewhat of a ritual, when we are driving in certain parts of Seattle on our family trip to the city, my kids yell out that in another block there is a store that sells recreational marijuana. If that's not the ultimate in parental pride I don't know what is! How crazy is it that my kids remember the signs pointing to where it's legal to buy weed, but have trouble remembering their multiplication tables! But such is the situation in certain US states.

Now I am not going to write about the advantages and disadvantages of marijuana legalization, except about how it relates to your portfolio.

I've had some clients who have been buying cannabis stocks for much of the last two years and made a lot of money. Together we researched the few publicly traded companies and they went ahead and decided which stocks to buy. They were making money in an up-and-coming industry. That is really the way to invest. Think out of the box and figure out what future trends may occur. Certainly the cannabis trend is going to be with us for a long time. The question an investor has to constantly ask is whether stock prices have gotten ahead of themselves or if the companies are still cheap in relation to the greater trend.

That was then and this is now

My phone and email have been inundated over the last few weeks with clients asking if they should buy cannabis stocks. Articles are popping up all over about the “need to invest now” in this sector and those that do will get rich. Stock prices have doubled or more in just the last few months as Canada passed legislation to legalize recreational marijuana.

When this happens I get very worried. Nothing goes up in a straight line forever, and this seems to have “bubble” written all over it. Can you say Bitcoin? Remember how last year any stock that had to do with the crypto-currency or other competitors skyrocketed and we saw the same headlines. Since the end of '17 the price of Bitcoin and other cryptos has been more than halved.

After being asked whether cannabis stocks are in bubble territory, noted investor and Mad Money host Jim Craner said, “This whole group has gotten too hot. Is it a bubble? Absolutely. People are too excited right now. It will end badly when the stock market gets flooded with cannabis stocks. I just don't expect it to end quite yet.”

Medical vs. Recreational

Being is Israel, most of my clients have been asking about medical marijuana, as it's no secret that in the startup world huge money is being raised for these companies. Even former PM Ehud Barak, who has made millions in his involvement with Israeli startups, has just joined InterCure as chairman. What investors need to know though is that the overwhelming majority of cannabis stocks that currently trade are of the recreational variety.

There aren't too many medical marijuana companies that are publicly traded and the ones that are haven't fared all that well. The big money that has been made in cannabis has been made in recreational stocks. For those looking at medical marijuana companies, keep in mind that they are like any other new pharma or biotech company, meaning that it takes time for their technology to translate into a drug, and they need to go through regulatory approval.

From the little history that cannabis stocks have there appears to be some seasonality in the way they trade. Over the last few years, the major gains have come from spring through the beginning of fall; late fall and winter haven't been kind to these shares.

Be careful

Obviously, it goes without saying that whenever investing – certainly with such small and volatile issues – investors needs to do their own research and decide whether the company makes sense to buy shares in or not. It may pay to see if the bubble bursts and then, after a massive pullback in those stock prices, try and pick the best companies to invest in. But again whether you choose that approach or decide to jump in now, please do yourself a favor and research the stocks – and then research them again before making a final investment decision, so that you really understand what you are buying and the risks involved.

The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.

The writer is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel. For more information, call (02) 624-0995, visit www.aaronkatsman.com or email aaron@lighthousecapital.co.il.