By: Arjun Katechia ’19
With its therapeutic and relatively harmless effects, cannabis, or marijuana, has gained widespread popularity throughout the United States. Its prominence, coupled with the proclaimed benefits, has prompted its legalization in 28 states across the U.S. for medical and recreational uses. As a result, a plethora of companies and dispensaries have opened up to sell the drug.
The prospects of producing and selling cannabis seem bright: the cost of production is far less than the cost of consumption. Profits of sellers run very high, such that growing cannabis in certain areas is a quick way to become fairly wealthy. According to the Cannabis Spot Index, producing a pound of marijuana using an indoor growing room costs an average of $225, while consuming a pound of marijuana currently costs an average of $1831. Legal sales of cannabis are projected to rise from $7.1 billion to $22.8 billion by 2020, as projected by the Arcview Market Research.
However, on a federal level, marijuana is yet to be legalized. The substance is classified as a Schedule I drug (The DEA defines Schedule I drugs, substances, or chemicals as drugs with no currently accepted medical use and a high potential for abuse). While the Obama administration led a hands-off approach, defunding the DEA’s prohibition of marijuana in legal states, it is unclear what direction the Trump administration is going to take. Although in the past Trump has encouraged the legalization of marijuana, his newly adopted populist approach might overturn such views. A conservative Congress could very well reverse the progressive steps the Obama administration took, causing serious issues in the marijuana market.
Even though investing in marijuana may seem like a rare and extremely lucrative opportunity, investors must proceed with great caution in investment. As marijuana becomes legal in many states, investor interest in marijuana-related companies has increased greatly, as well as the especially volatile startups—that claim to produce the drug. In May 2014, the U.S. Securities and Exchange Commission (SEC) released a marijuana investment alert, alerting Americans about certain scams, where companies claim their operations relate to the marijuana industry. The concerns that the SEC felt towards marijuana businesses proved to be true: stocks fell greatly in 2015 all the way until March of 2016, when they began rising again. A 2015 investment in marijuana would have been crippling to an investment portfolio. However, in 2016 it might not have been such a bad idea. The stocks have been very volatile, especially as new and larger companies enter the market.
Due to the volatility of returns on cannabis stocks and the immaturity of the marijuana market as a whole, investment in this market is a bit of a crapshoot—as of now, potential risk outweighs the potential benefit. In upcoming years, once the marijuana market matures to an extent—once marijuana is legalized federally, the DEA reclassifies the drug, and larger, established companies exist in the market—marijuana will be a good investment.