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10 Mistakes to Avoid When Investing in Cannabis Stocks

by Brett Tortorello 3 years ago in investing
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The cannabis industry is booming and pot stocks are becoming a viable way to invest your money; however, there are plenty of mistakes to avoid when investing in cannabis stocks.

Investing your money isn't as cut and dry as it might seem to novice traders. Investment gurus like Warren Buffett and Benjamin Graham didn't accumulate their vast fortunes from the stock market by simply playing eeny, meeney, miney, moe—they used tried and true methods that were developed over time.

Arguably, one of the best ways to build your fortune is to get in on a new industry during its infantile stage. One of the biggest—and most lucrative—is the burgeoning cannabis space, which is projected to hit a valuation of $32 million globally. There is a lot of money to be had, but in a brand new industry, there are plenty of risks to consider. Let's take a look at some of the biggest mistakes to avoid when investing in cannabis stocks, so you can ensure your portfolio grows substantially. While there is no real way to know if your stock will be a smash hit or not, there are plenty indicators to point you in the right direction.

Don't put all your eggs in one basket.

This is sort of a rule of thumb when it comes to investing in general, but especially true when putting your money into a brand new industry like cannabis—make sure you diversify your portfolio. When it comes to marijuana stocks, you shouldn't put your eggs in one basket. Invest in a few different marquee companies, such as Canopy Growth, Aurora Cannabis, or Cronos Group, without putting too much money into one particular one. This way, you can hedge your bets, so to speak.

Make sure not to over-diversify either though.

Conversely, over diversification could lead to a lack of gains. If anything, this is the recipe to breaking even on your investments. If you just put a little bit of your money into 15 different stocks, chances are you're not going to hit big on any of them. The key is smart diversification—not over-diversification. As you will come to know, there is a huge difference.

Don't read too much into press releases.

Another mistake young investors make is getting all their information from press releases. These releases come from the company themselves, so they're obviously only going to highlight the good things that come out of the company, with a failure to disclose a majority of the risks. Since the cannabis industry, as a whole, is fairly new in nature, make sure you take press releases with a grain of salt.

Do your research.

This goes hand-in-hand with the aforementioned tip. A lack of research, which includes (but is not limited to) ONLY looking at press releases, is a sign of fiscal irresponsibility, and is one of the terrible mistakes people make with their money when investing. After all, it's your money that you're investing, so you better be diligent about learning the ins and outs of the cannabis companies you're planning on investing in. Look for key indicators such as whether or not the company has filed with the SEC, if their filings are publicly accessible, and how the right side of their balance sheet stacks up to other companies.

Be wary of ditching your old investments for new ones.

This is also a mistake a lot of first time cannabis investors make. Oftentimes, they'll ditch some of their safer, blue chip stocks in the hopes that they get a bigger payout. This isn't necessarily a good call, however, considering the rudimentary nature of publicly traded marijuana stocks, in addition to the overall uncertainty surrounding the cannabis space as a whole. This also goes hand in hand with diversifying your portfolio. Make an effort to combine low risk investment opportunities, such as mutual funds and dividends, with some higher risk, higher reward marijuana stocks.

Don't assume all pot stocks are good.

One thing about the cannabis space has already been determined: It is oversaturated with publicly traded companies looking to make their mark in the burgeoning industry. Assuming that all cannabis stocks have potential just because the space is in its infantile stage is massive oversight. Any wall street person will tell you that this is a poor way of viewing any industry, really. Every space—whether it be tech, manufacturing, or oil—has good companies and bad. It's up to you to weed out the ones that aren't going to be major players in the future.

Don't try to "get rich quick."

Patience is a virtue when it comes to investing. This couldn't be more true for cannabis, as the space itself is infantile, and the plant is still not legal on a federal scale in the US. Instead of day trading marijuana stocks, look for a company with a good balance sheet, high market cap, and promising revenue, and hold on to it for the long run. If you're looking to make some real money, don't try to hit a homerun in the first few months—make a sound investment, and hold on until the time is right.

Speculation over analysis will usually be a serious financial blunder.

One of the scariest aspects of investing in cannabis, admittedly, is the large part speculation plays in the process. The cannabis market, as a whole, is largely speculative, mostly because of its up-in-the-air status in terms of widespread federal legalization. Perhaps looking into Canadian pot stocks like CGC, Tilray, and Aurora cannabis can help ease the burden, but like any stock, use charts, graphs, or whatever other research tools you can to make sure your investment is a sound one.

Don't sell too quickly.

Cashing in your cannabis stocks too quickly is a mistake that isn't quite the end of the world, but it will definitely hinder your overall gains. The best day trading strategies, for example, are comparable to just going to the casino and playing blackjack. You might as well, at least, hold out for any promising news regarding the company, or the cannabis space in general, to drive up your stocks. There's no real time frame of when to sell your stock, but if you're trigger happy—in terms of selling—you might miss out on a much more lucrative cash haul.

Don't sell too late either though.

Conversely, selling your shares too late could arguably be considered the biggest mistake when investing in ANY stock, let alone a volatile cannabis stock. While the benefits of long term investment in the stock market cannot be understated, don't let greed overcome you. If you feel like you've hit your goal in terms of gains and there is no more room for growth, simply sell your stock. You know the old adage—you can always buy but you can't always sell. Holding your stocks into a bear market is easily one of the biggest mistakes to avoid when investing in cannabis stocks. If the market is hot, sell, sell, sell!


About the author

Brett Tortorello

I’m a middle aged man currently working as a Shift Supervisor at Bob’s Furniture. I’m thinking about opening up my own restaurant some day, but my real passion is expressing myself through writing.

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