Up in smoke

My dumbest investment was buying shares of Canadian marijuana company Aurora Cannabis in 2018. I learned that you shouldn’t buy companies in nascent industries and companies that don’t have profits. That’s speculation — not investing. — J.P., online

The Fool responds: Ouch — though Aurora Cannabis topped $120 per share in 2018, it has recently been trading around $10 per share.

Aurora has made some big acquisitions and funded that activity by issuing additional shares of stock. That “dilutes” the value of existing shareholders’ shares, as each share ends up representing a smaller piece of the pie. Meanwhile, though cannabis use was legalized in Canada, the country was slow to approve business licenses, and Aurora’s supply outstripped demand. Today, the company remains challenged. It’s been cutting costs and becoming leaner, but it has also remained unprofitable — burning cash.

You needn’t avoid investing in every new industry, but know that it can take years before it’s clear which companies in an industry will end up dominant and profitable. Unprofitable businesses can be OK to invest in, too, as long as they’re likely to become profitable at an acceptable point. But sticking with already profitable, well-run and growing companies is safer and can serve you better.

The marijuana industry is promising. A little research might turn up more attractive companies than Aurora Cannabis.