Cannabis has been legalized for medical use in 29 states and approved for recreational use in eight, and market observers, including the majority of financial advisors, believe it is only a matter of time before its national prohibition comes to an end.
That means we are witnessing the birth of a new industry, akin to what happened after the ban on booze ended in 1933. That led to a $200 billion business in the U.S., according to the Beverage Information Group. The fact that pot could be on a similar trajectory—Cowen & Co. predicts $50 billion in annual legal sales by 2026, up from $6 billion currently, for both recreational and medical use—makes investors take notice and look for ways to get in early.
But there is early, and there is too early. An uncountable amount of speculative money is flowing through a seemingly endless number of start-up firms, investment pools and penny stocks, many of which will go up in smoke. “I track 550 companies, and about 90 percent of them are frauds,” says Alan Brochstein, Houston-based publisher of 420 Investor, a marijuana investment publication. “Even if the companies are real, they’re unlikely to make it.”
If it feels like the Wild West, it’s largely because cannabis is still considered a Class 1 drug, like heroin, and is illegal under federal law. That prevents banks and other larger financial institutions from providing investment capital or even a payments infrastructure behind the “budding” industry, and invites a fair number of outlaws, reckless money managers and fly-by-night stock operators looking to make quick profits.
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