Don’t Fall Victim to the No. 1 Mistake of Marijuana Investing

Warren Buffett may be considered the greatest investor of all time, but that doesn’t mean we agree with every piece of investing advice he gives.

Lately, he has been telling investors to go passive with their equity exposure through exchange-traded and index funds. That’s advice we just can’t stand behind.

Especially when it comes to marijuana investing…

The game for Berkshire has always been buying great companies at cheap prices.

Imagine what would happen if everyone did the same thing?

Those prices wouldn’t nearly be as inexpensive as investors bid up shares.

To the extent Buffett can keep the masses away, he can keep buying shares on the cheap.

That’s an important lesson for anyone managing a portfolio of stocks.

Even more so for those looking to start marijuana investing where the winners and losers come and go quickly.

The rapidity of evolution in the sector demands investors be nimble.

Active management is absolutely critical when it comes to investing in marijuana stocks.

And yet, Wall Street is racing to offer the passive crowd an opportunity to buy a basket of marijuana stocks using the ETF model.

The largest of these is the passively managed Alternative Harvest ETF (NYSE: MJ) with $1 billion in assets.

While having a basket of stocks theoretically reduces risk of loss, what happens if the ETF owns the wrong marijuana stocks entirely?

There is no way to escape what very well may be a poor decision by owning a fixed portfolio of marijuana stocks.

A year from now, the sector may look entirely different.

After all, the ETF is up just 15% in the last 12 months. Those aren’t the types of explosive gains anyone investing in marijuana is looking for.

Plus, Alternative Harvest will have no way to react, and that could lead to big disappointment for those hoping to capitalize on cannabis investing.

Then there’s the new exchange-traded fund, AdvisorShares Pure Cannabis ETF (NYSE: YOLO), which comes with a list of marijuana stocks that it can hold at any one time.

On the surface, that is a brilliant solution to the main problem with a static portfolio. To the extent there are issues with a particular name in the portfolio, YOLO can jettison the loser and find a new stock to own.

Unfortunately, such flexibility comes at a price… a price that can be quite significant.

As a new ETF, YOLO is quite small. That means it can be illiquid.

That illiquidity opens the door to the potential for big losses owning a cannabis ETF like YOLO.

ETFs are traded on a public exchange with a listed price to buy shares and a listed price to sell shares.

In normal conditions, this bid/ask spread is narrow even on a small ETF like YOLO, but when markets act crazy and volatility is high, that spread can be large.

In such conditions of panic, investors in YOLO who want to close a position may be selling at a price that results in a significant loss of capital.

Typically, a large spread comes exactly at the wrong time… just when you want to sell your shares.

That’s a hidden risk to owning ETFs that needs to be factored into your portfolio management equation.

There’s a far better way…

Avoid the Pitfalls of Marijuana Investing with This Strategy
When it comes to marijuana stocks, do what Buffett’s Berkshire Hathaway does. Own individual marijuana stocks instead.

It’s said the benefits of a diversified portfolio ends at about 20 stocks. Own too many stocks, and you start seeing diminishing returns on the portfolio.

In other words, there is limited benefit to owning a large basket of stocks like those owned in the marijuana ETFs.

Why not simply build your own portfolio of individual marijuana stocks?

Most certainly, you would eliminate the bid/ask risk that comes with owing an ETF.

The question is which stocks should investors buy when building a portfolio of marijuana stocks?

Finding the winners is definitely easier said than done.

Individual investors tend to lack confidence when buying individual shares. That’s the main attraction, along with low fees, of the ETF market.

But that’s what we’re here for. We have your back.

Our team of analysts is on top of the marijuana market, and we will show you exactly which stocks to buy.

The key is owning the right stocks – but here’s the thing.

Since it’s such a speculative industry, you have to accept certain risk when marijuana investing. But all it takes is one massive winner to put your portfolio in the win column entirely.

And our experts can show you just how to do that.

It is far more attractive in my opinion to owning a portfolio of stocks that I select instead of an ETF and the potential problems that brings.

— Jamie Dlugosch

Source: Money Morning