I thought I was a genius when I bought Canopy Growth stock at $37 a share in January, then sold it in August at $50 a share. Until the week after, when it shot up to $67. Then I felt stupid. If only I had held on a little longer, I could have made thousands of dollars more! Or, if only I had bought when it was $10 a share in September 2017 — then I would have really made a killing.
It got me thinking: When’s the best time to sell your weed stock? Does that time exist?
I know the old adage “buy low, sell high” is the only way to make money on the stock market. But when an industry is as volatile and exuberant as cannabis, it seems almost impossible to keep my head on straight, my emotions in check and be satisfied with my decisions. When everyone around me seems to be making big bucks off a few speculative plays, it’s easy to fall into the trap of thinking “If only I waited a little longer,” or “If only I sold then,” or “Why didn’t I think to invest last year?”
But the truth is, no one can time the market. That’s especially true for an emerging industry, which operates differently than established industries such as banks or utilities. Emerging industries usually take years to become profitable because the consumer base is unknown, companies have yet to prove their capabilities in distribution and sales, and the landscape is dotted with upstarts that may very well be swallowed up.
The dot-com industry of the late 1990s and early aughts is a cautionary tale of an emerging industry running rampant, flying high, and then crashing and burning due to investors’ deep-seated fear of missing out, and egos inflating past the point of return by ignoring financial fundamentals. Several dot-com companies that increased in value by up to 2000% simply disappeared, and about $5 trillion in market value was wiped out in two years.
Yet that downturn produced Google, Amazon and eBay.
Similarly, cannabis as an industry is likely to survive and thrive. The question is, how can an investor avoid buying something like Pets.com in 2000? How can they ignore the noise, the FOMO and the frenzy and actually earn a profit?
I spoke with Darryl Brown, a fee-only investment advisor for You&Yours Financial and Jeff Kaminker, president of independent wealth management firm Frontwater Capital, to see if there’s way to time an investment in an emerging industry.
Here are five best practices:
1. Never be upset you made money
Kaminker told me that instead of being upset I sold Canopy right before it rose 34%, I should celebrate. Even though I could have made more money, I still made money.
“Bulls make money, bears make money, pigs get slaughtered,” he says, referring to an old adage that warns against excessive greed. “No one can perfectly time the market and know when to perfectly get in and get out. So good for you,” he says. Anytime you sell your cannabis stock at a profit, you’ve sold at the right time.
2. Do your research
Before investing in a cannabis business, research the industry and organization thoroughly. Read annual financial statements and analyst reports, and investigate the management team. Only then, once you truly understand the company you’re investing in, will you be able to time the market properly. Why? Because understanding the company will empower you to buy more shares when the price sinks.
“There is that discipline, first and foremost,” Kaminker says. It will also allow you to hold on to your shares when they rise, because you will feel confident they will rise further. If you don’t do your research you’ll end up buying and selling on share price alone, which is simply speculation — not investing.
3. Stick to a portfolio allocation
Brown recommends designating a specific percentage of your portfolio, like 5%, to invest in cannabis. But make sure to always maintain the percentage of your portfolio at that 5%. This means that if cannabis explodes in value and now makes up 15% of your portfolio, you should sell 10% of your profits and invest it into something else. But if cannabis sinks to 1% of your portfolio, it’s a good indication to load up on shares until it again reaches 5% of your total portfolio. That way, you’re always, by default, selling high and buying low.
4. Stick to large-cap stocks
Cannabis is risky game but you can reduce your risk by sticking to the larger firms like Canopy, Aurora, Cronos and Aphria. The bigger firms have infrastructure, contracts and a business model. They’re far more likely to stick around in the future compared to small-cap stocks “The larger companies currently have larger platforms, they have greater access to information, there is greater diversification, Brown says.
Kaminker echoes Brown: “I just don’t know if they’re going to survive and it’s harder to know what’s really going in with the smaller-cap names.”
5. Find a benchmark price
A secret to finding an attractive entry price is to copy larger firms. Kaminker says that if a big company is willing to make a massive investment in a cannabis company at a certain price, you should also feel comfortable investing somewhere around that price. International alcohol producer Constellation Brands made headlines when they invested $5 billion in Canopy in August, buying 104.5 million shares at $48.60 each. Investors can feel somewhat confident that if it’s a good enough share price for a 73-year-old company with a $40-billion market capitalization (as of this writing), it’s probably a reasonable price for you too.
Ultimately, cannabis is likely a long-term viable industry, but there are no guarantees. As the saying goes, never invest money you can’t afford to lose.