How to Avoid a Major Trap With Marijuana Stocks

Hype, Politics, & Pot Stocks

As any long-time Profit Confidential reader will know, I’m a big fan of marijuana stocks. I’ve been a pot stock bull for years, writing about equities that have gone on to see hundreds of percentage points of returns. But I’m also not blind; pot stocks carry with them some degree of risk. But that’s to be expected with an emerging industry.

Having said that, there’s one mistake that I’ve seen over and over again that any serious marijuana stock investor ought to be aware of.

That mistake? Falling for the hype created by stillborn pot legalization bills.

Essentially, the marijuana industry is perhaps more directly connected to politics than just about any other industry. That’s due to the fact that, to this day, the vast majority of countries continue to enforce pot prohibition—despite marijuana largely being considered less harmful than, say, tobacco or alcohol. Not to mention that marijuana has a number of potentially beneficial effects in the field of medicine.

Despite all that, there are still many politicians fighting tooth and nail to ensure that cannabis remains illegal. Diving into the reasoning behind their anti-pot arguments is frustrating, and frankly, not all that useful for our purposes here.

It’s important, however, to acknowledge that these politicians exist and are the largest hurdles to rapid pot stock growth.

Whether you find politics infinitely interesting or mind-numbingly boring, in order to be an effective marijuana stock investor, you need to stay at least somewhat abreast of the political machinations regarding pot legalization.

After all, getting in the on ground floor of a nascent industry in a country set to legalize it is exactly how investors gained from pot stocks that skyrocketed in value during the Canadian marijuana legalization push.

What it all boils down to is that marijuana stock growth is not singularly tied to politics, but politics are, and will continue to be, the strongest driver of pot stock growth.

With that established, let’s get back to the trap I mentioned earlier: people getting caught up in the hype over stillborn political moves.

In the U.S., where this trap is most prevalent—and most dangerous—but hardly the only place it occurs, we’ve seen several federal bills pass the House and seem to gain momentum, only for them to be slaughtered in the absolute partisan deadlock that is Washington.

There have been several U.S. marijuana legalization bills proposed over the years, in both the House and the Senate. The result? Marijuana remains federally illegal in the U.S., with no sign of that changing in the near future.

While there was excitement in the beginning of the Joe Biden presidency and the congressional majority for the Democrats (who have made marijuana legalization a pillar of sorts in their national political platform), that excitement has died down as Biden seems content to let the status quo reign regarding marijuana laws.

In the absence of federal action on pot legalization, we’ve had to content ourselves with political gains at the state level. There have been big gains, to be sure, but they frankly won’t alter the market all that much (the vast majority of U.S. marijuana stocks are unavailable on major exchanges, due to the federal prohibition).

The trap that many investors get caught in is that they read that “so-and-so” bill has been approved by the House or has gained momentum in the Senate (or that Senate Majority Leader Chuck Schumer said he was making marijuana a focal point of the Senate) and believe that federal U.S. marijuana legalization is just around the corner.

The excitement is a good thing, but the truth of the matter is that it’s all posturing. There’s no immediate path toward federal U.S. marijuana legalization without Biden, due to the political deadlock I mentioned earlier.

We’ve seen bills get passed by the House (where they need a simple majority vote to move through), only to be stopped in their tracks when they reach the Senate (where the filibuster essentially requires all bills to reach a 60-vote supermajority to be passed).

The same thinking goes for bills like the Secure And Fair Enforcement Banking Act of 2019 (SAFE Banking Act), which would open up capital for pot companies by protecting banks that hold cannabis-derived revenue. Right now, cannabis is pretty much an all-cash business in the U.S., prone to theft and other financial crimes.

No matter how many times these bills are reintroduced, there’s simply no viable path to legalization with the U.S. Senate as broken as it is. So really, the only direct path to legalization is through the authority of the president, who, as I’ve mentioned, is not a marijuana legalization supporter.

That means any time there’s news regarding marijuana legalization bills, it pays to do some digging, rather than get swept up by the hype, only to see swiftly made stock gains disappear when reality rears its ugly head.

Does that mean pot stocks are doomed?

Of course not! They remain, in my view, among the strongest equities on the market right now. But it does mean that investors need to avoid the artificial excitement created by misleading headlines, and to do solid research to understand where the real value lies.

Analyst Take

While the future of the marijuana industry is reliant on political advances (especially in the U.S.), we’re likely a few years away from seeing real movement among the largest markets.

That means a buy-and-hold strategy involving the marijuana stocks best positioned to take advantage of U.S. marijuana legalization when it does hit could still be the best tactic for pot stock investors.