Investing in the Marijuana Industry: What’s at Stake?

For a while now, medical and recreational marijuana has seemed to be a boulder rolling down a hill. Whether or not you agree with it, it's happening, and nothing can be done to stop it. Because it is such a new industry, it has been ripe for growth and investment.

Of course, given the legal red tape surrounding it, investing in marijuana will always come with some risks. It is still considered to be a Schedule 1 drug, and while states have legalized it, it is federally prohibited. Again, these seemed to be technicalities -- until Jeff Sessions was nominated by President-elect Donald Trump to be Attorney General. Sessions has a history of being aggressively anti-marijuana, which brings up new questions for investing in the industry. Is it still worth it? What are the potential financial gains and the risks? Here, we lay out some common risks of investing in marijuana and (more importantly) how to avoid them.

Know the market

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The road to wealth is paved with marijuana. So goes the rags-to-riches fairy tale of 2017. Because the marijuana industry is so new, and has the profound potential to boom, it also means that many people are being sold a pipe dream (no pun intended). Due to the stigma and the legal limitations (again, marijuana is still federally recognized as a Schedule 1 drug), the marijuana industry is still operating on the fringes. They haven't worked out the kinks yet, which means that your investment could fail due to something as simple as poor supply chain management.

The more you know about the way that the marijuana industry functions, the better off you will be. For example, at this point, medicinal marijuana is a safer investment than recreational marijuana, so if you're looking to invest, that may be a good place to start.

Potential Cost: Because of the tumult and Wild West nature of the marijuana industry, it's still a very risky investment. Any document you get outlining the investment details should tell you that you should only invest if you're ready to lose the whole of the investment. If the paperwork you're given doesn't have this caveat, you should be worried for different reasons.

Potential Benefit: Again, because the market isn't established, potential returns are greater. If you have the money to risk, marijuana could give you greater gains than if you were to invest in something more stable, especially if you know what you're doing.

Be the adult in the room (and make sure there's another adult in the room)

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When you're working in the marijuana industry, or investing in it, you're dealing with a lot of guys in man buns. They're thrilled that dank weed is finally getting the legitimacy (and money) it deserves. They know what they're talking about, and they know more about botany than we ever will. That said, marijuana tends to attract the Peter Pan entrepreneurs. They have found a way to make money and never grow up. You want to make sure that they're focusing on the former rather than the latter.

Moreover, it's important that even though you're investing in an industry with a more casual culture, you still have to do your due diligence. If anything, it is even more important that you take on the role of "adult in the room." When it comes to investing in marijuana, you can't trust anyone else to do your homework for you. To paraphrase David Copperfield, a merchant cannot be both buyer and seller, too.

Potential Cost: You could be working with people who know how to handle herb but don't know how to handle money. You'll also want to watch out for opportunists who are happy to take advantage of the dollar signs in the eyes of many investors.

Potential Benefit: Steve Jobs built Apple Computers in a garage. You might find the Steve Jobs of bud working in a warehouse.

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As we see it, this is the biggest question mark when it comes to investing in marijuana.The federal drug classification for marijuana is no joke. That means that even though it has been legalized in different capacities on a state level, it is still illegal on a federal level. Its classification as a Schedule 1 drug puts it right up there with heroin and LSD under the Controlled Substances Act.

While this was seen as a technicality for a while, it looks different under the incoming Attorney General. Sessions is militantly anti-marijuana, once famously saying that he thought the KKK "were okay until I found out they smoked pot." Those are the words of a man who will do whatever is in his power to stymy the marijuana industry.

Potential Cost: The truth is that we don't know how our incoming Attorney General will handle the legalization of marijuana. Yes, he hates it in theory, but we do not know that he will do in practice. At worst, he may take legal action against investors, which could have you on the hook for legal fees, meaning that you could risk losing even more than the original investment sum.

Potential Benefit: Is there ever a benefit when there is the potential for litigation? That said, Sessions vitriolic statements against marijuana may amount to nothing. On this particular point, a wait-and-see approach may be best. Once the Trump Administration has had time to settle in, we will be able to see Session's intentions more clearly.

At this point, investing in marijuana is at the riskier end of the spectrum. If you're looking to diversify your portfolio (and that means that you have a portfolio to begin with — if this is your first investment, we advise against making it in marijuana, due to the risk), marijuana offers the potential for some big earnings if you can withstand the potential financial and legal risks.