A Fool’s Play On Weed

marijuana-canada

When Prime Minister Justin Trudeau ran for office in 2015 and promised the legalization of marijuana, the biggest trade in the stock market was a run on weed stocks. It didn’t matter if the companies didn’t have an established business. It was the promise of growth and future profits that drew lots of investors into the fray.

One of the more popular weed ETFs that popped up during this time was run by Horizons with the stock ticker HMMJ. Another very popular play on marijuana was the Canopy Growth with the very appropriate stock ticker named WEED.

Both of these stocks were popular play by institutional and public investors that wanted to get their hands on the hottest burning commodity in the market. Just like every other industry in its infancy, the more people wanted in the higher the prices went. Soon stock prices were as high as the people smoking the product. But would it last?

Profits Matter

Just like any sustainable business, it needs to make money. No matter how much capital is raised and no matter how much hype can surround a business, it has to make money in the long run.

One of the most challenging aspects about running a business is figuring out how to turn money into more money. To investors, this is called the return on investment or ROI for short. If you are truly investing in a company, you want to make sure that the company makes money. It doesn’t matter if the stock prices continues to go up, it needs to make money. People who buy stock in a company and don’t understand this concept are called gamblers, not investors.

A look at Canopy’s past few years leave a little bit to be concerned for investors:

Mar 2017: $17M Loss
Mar 2018: $52M Loss
Mar 2019: $670M Loss
YTD: $1.9B Loss

These numbers should cause any investor to be very concerned. Despite cannabis becoming legal in Canada. Weed stocks have literally gone up in smoke. Companies with poor financial results never have good results in the stock market.

Like A Fool

It’s very easy to get caught up in the hype when investing. It’s especially true when people see the value of something go up we all want to get in on the action. Weed stocks were no different.

weed-rise

When you look at stock charts like this and everyone around you is doubling, tripling or even making ten times their initial investment, it’s not easy to get caught up in the hype and want to put money in.

I’ll admit, even for myself I get caught up in the hype and want to put money into a booming industry. But this is what we call Fool’s Gold. Or also known as the Greater Fool Theory. We think that just because it’s rising so fast that it’s going to continue rising. But the truth always comes out. What makes a good investment isn’t the stock price and the trend, but does the company make a profit?

weed-fall

If you were one of the unfortunate individuals that invested at the peak, you’re looking at a substantial decrease in value of the stock you just bought. Let this be a lesson. Stop chasing for easy quick gains. They don’t exist.

Weed Vs S&P 500

As this blog always says, stay with the tried and true way of building wealth. Work, save and invest in a broad based ETF like the S&P 500. There’s no better way to build a long term successful portfolio.

If we rewind to look at just what an investment in a weed ETF like HMMJ would look like now and how the performance of the S&P 500 has performed we can compare just what is better? A hot sector ETF or a basket of diversified stocks in all industries.

hmmj

S&P vs weed

Holding a weed ETF since its inception has only yielded 2% in growth. Looking at the S&P 500 index, the index alone would have returned slightly over 2% in dividends per year, additionally the market in general, even with the big 20% drop at the end of 2019 is actually up.

Since April 2017 when the weed ETF was introduced, the S&P 500 has increased over 33%. That’s 33% vs 2%. This goes to show that investing long term in a diversified portfolio is far superior to picking the “hot” sector. That’s because the hot sector is only hot for so long until it fizzles out. Once people realize that the quick and easy money is gone, they start chasing after something else.

Don’t Take The Bait

When someone talks about how easy it is to make money, usually they are just lucky. Most of the time, gamblers in the stock market lose more money than they make. This is why we must not tempt ourselves to move away from what works. That’s a balanced, diversified portfolio.

We all want to find easy ways to make money, but the reality is, that doesn’t exist unless you are the lucky one to hit the lottery. The only way to truly become financial independent is to work, save, be frugal and invest your way to financial freedom. There’s no easy way.

The majority of us will not become 1%, but we can become financially independent. There is a difference to the two statements. Being filthy rich where you don’t worry about your money and you can be frivolous can be great, but being free of worrying about your finances can also be equally rewarding. It all depends on how ambitious your goals are and how realistic it can be achieved.

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