The debate over the merits of legalizing marijuana won’t come to a close anytime soon. At the same time, the merits of investing in marijuana also have their share of proponents and detractors.
While more and more states are moving toward either permitting medical marijuana or the outright legalization, the drug is still illegal under federal law. Despite states softening their marijuana laws, the U.S. government recently reaffirmed its classification of marijuana as a Schedule 1 drug. So-called “hard drugs” like heroin and LSD are also classified as schedule 1 drugs.
Further complicating things is that about half of the states have varying degrees of legality, while other are have passed less-strict laws but have yet to implement them. It’s a confusing patchwork of guidelines, but the one thing that can’t be denied is that marijuana can potentially be lucrative for investors.
No matter how you look at it, the trends show that more people are getting access to marijuana — especially of the medical variety. There are more than 1.2 million legal medical marijuana patients in the U.S.
Recreational use amongst teens is also popular, which is why opponents aren’t rushing to legalize the drug. A recent study found that 58.2% of 12th graders have used marijuana in the past year, and there are serious concerns about the addiction and other health risks.
Despite that rise in marijuana’s popularity, the merits of investing in medical marijuana aren’t so clear-cut from a financial and perhaps even moral standpoint. Here’s what you need to know.
Avoid the Penny Stocks
When legalization in some states started becoming a possibility, a slew of marijuana-related penny stocks popped up. As a rule, serious investors should always avoid penny stocks. There’s a lack of transparency that makes investing in them a total crapshoot. At their worst, penny stocks can be scams. Even if they’re not, odds are you’ll lose lots of money through these stocks.
Want some examples of how badly things can go?
There’s Cannabis Science (CBIS), which has lost 99% of its value since launching in 2008. The Marijuana Company of America (MCOA) lost 96% since its launch back in 2002.
A few of these marijuana-related penny stocks have soared to incredible heights, turning some people into suburban millionaires, before crashing down. They rise and fall at the drop of the hat, which is a big warning sign to stay away.
Big Pharma Gets in on the Action
A 2016 survey shows that 61% of Americans believe marijuana should be legalized. Lawmakers are responding to this shifting in public opinion, with medical marijuana increasingly becoming legal throughout the US. Full legalization is still a long way off for many states.
With medical marijuana being legitimized both by the public and by state laws, big pharmaceutical companies are slowly getting in on the action. While traditional pharmaceutical companies have long opposed medical marijuana, it’s at the point now where they’ll lose a lot of money if they’re caught completely flat-footed.
For investors hoping to invest in legitimate companies utilizing marijuana and not dodgy penny stocks, some big pharmaceutical companies are promising.
One of the companies investing heavily in marijuana research is GWPharma (GWPH). This British company could be the first to get FDA approval for a marijuana-based prescription drug.
A Moral Question
With companies looking to make money both from medical marijuana and recreational products, there are some more considerations to make. First, the scientific evidence on the benefits of medical marijuana is often uncertain. Marijuana can also be abused as the global number of illicit drug takers is steadily on the rise.
For some investors, those are considerations to make that could be just as meaningful as a company’s financials.
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Anum Yoon is personal finance blogger who started and maintains Current on Currency. You can catch her on Twitter to follow her updates.
Photo Credit: iMarijuana.com
Nice post Anum. I agree there is a lot of potential reward here, although that certainly comes with more risk too. As you mentioned, it will be curious to see how big pharma moves on this opportunity.
Hey Anum,
It’s been a while since we talked, but this post is awesome!
I think marijuana will definitely be legal in ALL states in the future. Of course, the timeframe of that is completely unknown, but it seems to be happening sooner rather than later.
The issue here is: which company do you invest in? When Warren Buffett talks about why he doesn’t invest in innovation, he points out that if you were to invest in the automobile when it was first released, you would have had to pick one of a few companies (around 3 or 4) of the initial 100 automobile manufacturers for the company to still be in business today.
Personally, I think we have time to wait, and still get in early. This won’t be a quick process of legalization, but it’s definitely something worth watching!
Cheers,
Kalen
Hey Kalen!
Yeah, it’s definitely been a while! I’m glad you enjoyed the post. I had a lot of fun looking into this subject. I definitely agree with you that we still have time to wait. It’ll be interesting to watch how everything folds out, especially after the November elections.
Where are the Twinkies, man?
I ate ’em.
Ask Colorado and Washington residents what has happened in the very short time this was legalized in those states. Crime and rampant homelessness have shot up as much as 30% or more. Here in Seattle, the homeless have completely overrun the city. Many visitors to our state have vowed never to return because its so bad. Property crime, auto thefts, driving under the influence and parks so littered by drug paraphernalia that they become unsafe are just some of the things you’ll be faced with. Its long been acknowledged that marijuana use leads to harder drug use so stop fooling yourself that its harmless. There are many addicts in and out of recovery that can vouch for that.
The financial gain one would acquire from poisoning their own people will not be worth it by any means. This goes well past simply putting others in harms way. It will cripple our society and lead to only more crime and homelessness. How anyone could consider that a viable investment is shocking.
Hi Yvonne,
I completely understand where you’re coming from, which is why I also wrote about the moral implications and touched on both sides of the debate. The same could be said about oil & gas stocks, gun stocks, etc. There are moral and social implications to investing in certain industries, so more and more people are choosing to invest based on their conscience.
Regardless of where we stand on the subject of legalization, the cannabis industry continues to gain legitimacy among investors and entrepreneurs.
Colorado, Washington, Oregon, and Alaska are still in the early stages of legalization, so it’s hard to tell if these negative social side effects you mentioned will improve with time. These state governments are still in the process of learning through trial-and-error and are looking to prevent and reduce marijuana-related crimes through better legal framework and enforcement.
The Legalized states are proactively trying to use the new revenue stream to positive use for their citizens. Alaska recognizes the problem of substance abuse, so they have allocated $3 million of their marijuana-tax revenue to fund substance abuse treatment, health and social services, and the department of public safety. Washington has also allocated 60% of their marijuana tax revenue for substance abuse prevention, research, education, and health care. Colorado is spending 35% of their tax revenue for school construction, and Oregon is spending 40% on schools and another 20% on drug services, mental health, and alcoholism.
Appreciate your comments, Yvonne! Thanks for reading.