How to Invest in Marijuana Stocks the Right Way

If Abigail Van Buren and Ann Landers had teamed up and become personal finance and investing experts -- and if they'd kept working into the podcast era -- one can imagine the result might have been a little bit like the Motley Fool Answers' monthly mailbag episodes. (Though they probably would have done less "awfulizing.") Certainly, there are plenty of us who could use some guidance in the money realm -- so many, in fact, that two advice givers are hardly enough. So for this podcast, hosts Alison Southwick and Robert Brokamp have brought back one of their more popular guests, senior analyst Emily Flippen, to chime in.

In this segment, the question is right in Flippen's wheelhouse, because she's part of our Marijuana Masters team. Listener Susan wants to invest a small amount in the marijuana production side of the industry and is looking for the best companies and the right strategy.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

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This video was recorded on May 29, 2019.

Alison Southwick: The next question is from Susan. "How do I go about investing in marijuana production, and which companies are best? I'm only looking to invest a very small amount of $100."

Emily Flippen: I want to go off on a little side note.

Southwick: Please do!

Flippen: Susan, I am so excited by the fact that you're interested in investing in marijuana stocks. Here at The Motley Fool, I work on our Marijuana Masters Service along with Shannon, another analyst. The two of us have looked at metrics for our Marijuana Masters Service. Do you know what group owns predominantly marijuana stocks here at The Motley Fool?

Robert Brokamp: I don't know.

Flippen: Women!

Brokamp: Really?

Flippen: Women tend to be very interested, especially in comparison to the male cohort, in buying pot stocks. First of all, Susan, thank you for contributing to that! I'm onto something here. Maybe we need a female-oriented pot service.

Southwick: Right.

Flippen: So I just wanted to note that before I answered your question.

Brokamp: That's interesting!

Flippen: So all of that being said, and as excited as I am by the marijuana industry, I will say it is extremely risky, and there's a couple of things you need to know. You got the first part down, which is invest only a small amount of money -- only the amount of money that you can afford to lose. So when you talk about investing a small amount -- say $100 -- as long as that's a low percentage of your entire portfolio, you should be fine.

Think about it in terms of the amount of your portfolio and that you'd be totally OK if it went to nothing, because honestly, a lot of marijuana companies, right now, are extremely hyped. Extremely overvalued. We saw the same thing happen with cryptocurrency. When the media gets ahold of something in an industry, people want in, and it's great, because unlike crypto, I do see the underlying demand for marijuana, but you need to invest wisely.

This is why I'm part of the Marijuana Masters Service here in the U.S. We tend to invest in not only pure-play companies that have strong financials, but there's ancillary companies, so the companies that are going to succeed even if marijuana were to fail. Some of the companies that we tend to like a lot are OTC Markets Group. That's a great example of a company. They actually own a lot of the over-the-counter exchanges, so as these marijuana companies list -- and lot of them do and a lot of them will fail -- they're poised to succeed regardless.

But if you are really interested in getting into maybe the pure-play companies -- the producers -- it's important to focus on companies that have strong underlying financials. Avoid companies like Tilray and Acreage Holdings, those companies that you hear a lot on the news, because they have weak financials. They have a lot of debt, a lot of shareholder dilution, and you're not likely to make up your investments. But if you choose to go into the marijuana industry, just remember to invest only what you can lose.

Southwick: With the marijuana industry, how likely is it that all of these little companies that are producing marijuana are just going to get bulldozed if a major company decides, "You know what? Now we're a marijuana company."

Flippen: We've already seen a lot of major companies start to invest in the space. I think it's more likely that a lot of these companies will be bought up. Whether that be at a discount or a premium is to be determined. A lot of them will fail. A lot of them will go to nothing.

Look at the beer industry, for example. People tend to mischaracterize the marijuana industry. You see a lot of it as a commodity. You see a lot of beer producers. Sure there's a commodity underlying them -- hops -- but you can tell the difference between beers.

The same thing is true for the marijuana industry. We're focused on really strong competitive advantage brand differentiation that will end up being, you could say, the Sam Adams of marijuana. And in a lot of cases that might actually end up being something like Sam Adams. We've already seen a number of beer producers, for instance, invest in the space.

Alison Southwick has no position in any of the stocks mentioned. Emily Flippen has no position in any of the stocks mentioned. Robert Brokamp, CFP has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends OTC Markets Group. The Motley Fool has a disclosure policy.