All over the world, cannabis companies are revving up for global reformation of marijuana laws. As new companies in the U.S. and Canada go public, cannabis advocates are looking to put their money where their mouths are. But is investing in cannabis companies a good idea? Are Americans even allowed to trade cannabis stocks? We spoke with Doug Lynam, a partner at LongView Asset Management in Santa Fe, about investing in marijuana.
The Paper.: Can you explain the legality around trading cannabis stocks? Can they be traded on the U.S. exchanges?
Doug Lynam: They can’t be traded on U.S. exchanges, but they can in the Canadian exchanges and other international exchanges. So it’s doable—it’s just a little bit tricky from a regulatory perspective. It just makes it harder. It makes it harder to invest in U.S. companies. You can invest in the funds, but they struggle to actually do business in the U.S.
Is investing in cannabis companies a smart thing to do? Is it still too early to start?
It’s still too early. It’s still the Wild West, the regulatory uncertainties and hurdles that come with trying to invest in these stocks and funds.
Just for clarity, we should distinguish between investing in stocks and investing in ETFs [exchange-traded funds—securities grouped together for various reasons]. The legality is the same on both sides, but I never recommend investing in individual stocks in any industry. Cannabis aside, it tends to be a losing long-term strategy for most investors. Ninety percent of stock pickers failed to beat the market average. You would think if you were a monkey throwing darts at a dartboard, you would always get it right half the time. But the problem with individual stocks is you have to be right twice—you have to be right when you buy and sell it. You’re playing a market timing game, which most people lose.
So leaving aside individual stocks, if we can, then we’re really narrowing the discussion down to ETFs, which is a more interesting investing space. But the problems there are unique compared to the problems of investing individual stock—which I would never do. When it comes to ETFs that are cannabis based, they tend to have very high expense ratios. So that’s one black eye against any ETF or mutual fund investing. They have almost a very, very tiny market cap. So they’re extremely volatile. That’s another black eye on them.
There’s regulatory banking challenges—especially for business in the U.S., like in New Mexico. Cannabis businesses have a short or non-existent track record. So that’s another red flag, regardless of the industry.
These funds also have a very high turnover rate. And most importantly, their profitability is extremely low. If you compare the five-year average rate of return for these ETFs, marijuana-based ETFs, most of them are underwater, and most of them are down to around 50 percent compared over a five-year average, whereas the S&P 500 [an index that tracks the performance of 500 large U.S. companies] is up 23 percent over the same time period.
The problem is when we’re talking about cannabis stocks we’re often comparing to other stocks within the cannabis industry. How does this fund compare to other funds in the cannabis industry? That’s not really the right metric. You also need to compare it to the entire investable universe. And when you open that door up and you just look at the S&P 500 and compare, they don’t hold water. They don’t make a lot of sense from a risk-reward perspective. That doesn’t seem to hold up at this point.
I’m hopeful that that will change and confident that it will change over time as the regulatory environment in the U.S. and around the globe becomes more favorable to these types of investments. But it is so murky and most of these ETFs have absolutely no price-to-earnings ratio—and that’s one of the first metrics you want to look at. Well, most of them don’t have any earnings compared to the price, so they’re underwater. You have to look at that and scratch your head, and no matter how enthusiastic you might be about marijuana in general, from a risk-reward perspective, that just doesn’t make a lot of sense for the average investor.
Is it normal for a new industry to have that volatility or is it completely due to the cannabis ban?
I can’t answer that off top my head, but I think it’s the right question to ask. My gut would tell me that that’s pretty standard for any new industry. If you’re looking at, say, the tech industry in the ’90s and 2000s. We saw these bubbles and bursts and bubbles and busts. I would suspect there’s going to be a similar parallel here. But this is still so new. I mean, really. It’s a little bit different than tech companies because of the regulatory situation. It’s hard to say.
Let’s compare it to something even more far afield, like say, cryptocurrencies. The first five years was nuts. It was all over the place. And they still are in the Wild West, but we’re seeing them increasingly mature to becoming more mainstream, and that that maturation process will happen for the marijuana industry. It’s just very risky at this point.
How can people know that the market’s ready and it’s time to start investing?
I think it’s going to be looking for signs from the federal government to decriminalize marijuana nationally. That’s going to have to happen. Until those floodgates open, it’s going to be pretty murky waters. But you know, when will that happen?