Why Cannabis IS a Risky Propositon For Investors

January 13th, 2020
January 13, 2020
Joseph Vecchio CPA, CFP, MBA

The discussion around marijuana has undergone great social, legal, and economic changes in the last few years: From Reefer Madness to hot new investing fad.
Think marijuana is missing from your portfolio? Read this first…
Marijuana is illegal on the federal level4
The marijuana industry is governed by a patchwork of state laws and remains illegal and classified as a Schedule I narcotic (the same category as cocaine and heroin) at the federal level. That means every producer, retailer, and consumer of marijuana is breaking federal law. Although the feds have largely taken a hands-off approach to its enforcement, until marijuana is fully legalized across the U.S., the industry exists on shaky legal ground.
The political picture is hazy
Even though the U.S. and many other countries have been swept by a wave of decriminalization and legalization, political opinions can change in the blink of an eye. This political uncertainty makes the future of the industry challenging and leaves investors with many doubts.
Marijuana faces a cash crunch5
Due to marijuana’s federal status, many banks and financial companies do not want to be involved. Handling money from marijuana-related transactions can be considered money laundering, and federal agents can seize the collateral that backs a business loan. As a result, an estimated 70% of cannabis-related businesses operate without bank accounts. Theft of cash, poor accounting controls, and the lack of credit may limit the industry’s growth potential.
Emerging industries are risky
The marijuana industry is very new, and emerging markets are characterized by increased risk and volatility. It’s common for new companies to start and fail or leave investors with holdings that they can’t liquidate. This environment is very risky for investors.
“New industries and technology are always fun to talk about, but they rarely make good investments.”
Financial Lesson: Marijuana is a long way from being a good bet for investors
Investment fads come and go, and marijuana has become part of the national discussion. When trends become part of everyday cocktail chatter, it can be tempting to put your money where your mouth is.
However, the cannabis industry just isn’t a safe place for investors. Until the political, financial, and regulatory issues are resolved, the industry’s future is highly uncertain.
New industries and new technology are always fun to talk about, but they rarely make for good investments. They’re far too speculative.
My team and I are always on the lookout for interesting trends and good investment opportunities for our clients. We may reach out to you as we come across any such opportunity and we’ll discuss them during our annual reviews with you.
If you ever have questions about something you hear in the news or are wondering about a new investment idea, come and talk to me about it. I like knowing what’s on your mind, and I like to keep on top of what’s going on in your financial life.
When you work with Shore Financial Planning, the financial advice we provide is ALWAYS in your best interest.
As a Certified Financial Advisor, NAPFA Professional, and Fiduciary Advisor, Joseph Vecchio offers unbiased and conflict-free financial advice & retirement planning services.