Finding which marijuana stocks that will become industry leaders remains a challenge. While October 2018 ushered in legal recreational use, investing in these stocks is still for aggressive investors, and we don’t recommend marijuana penny stocks
Investment interest has slipped since marijuana stocks first became available, but there are still those looking to add cannabis producers to the aggressive portion of their portfolios . At the same time, we think it’s as important as ever to our Successful Investor philosophy.
There are also marijuana penny stocks coming on the market aiming to take advantage of upcoming legalization in Canada and increasing investor interest. But buying lower quality marijuana penny stocks is one of those moves that can appear to be successful before it goes wrong. Some investors get hooked on it, since low-quality stocks can be highly profitable over short periods. That’s because they are generally more volatile than high-quality stocks that reflect our Successful Investor advice.
It may be appealing to look for hot marijuana stocks to buy, but there may be significant risks, especially with penny stocks.
Hot penny stocks do sometimes pay off, but there are many pitfalls to avoid.
Be aware that many penny stocks are little more than very well executed marketing campaigns. Penny stock promoters–far from offering sound marijuana stocks to buy–will do anything in their power to get their penny stock noticed. These extensive marketing campaigns include emails, TV interviews, podcasts, newsletters and paid sponsorships.
There are also some so-called news sites that will sell sponsorships to penny stock promoters. These are great opportunities for penny stock promoters but not for investors looking for an unbiased opinion on a stock.
Penny stock promoters love to make deals—however minor or indirect—with major, well-known firms. These deals are aimed at gaining the trust of investors. For example, a penny stock may issue a press release announcing that some household-name multinational has agreed to sign them up as a “channel partner” to potentially co-market a program or gadget. The promoters of the penny stock hope that the link with a major brand will give them instant credibility, even if the deal is far from guaranteeing any sales or profits.
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Follow these tips to profit from penny stock investing
Avoid penny stocks that trade at unsustainably high prices because of broker hype or investor mania about the underlying commodity.
Look out for acquisitions. Acquisitions can bring “time-bomb” risk. Companies sometimes grow quickly by buying other companies. But it may also be the case that those selling the companies may simply want to bail out of a losing situation.
Look for earnings or cash flow. A perpetual money loser will eventually go broke, no matter how impressive its technology. But if it makes even a little money, it can stay in business and perhaps reap the bonanza of a new product.
Spread your penny stocks out across different market segments. When making a list of penny stocks, we recommend investing in a range of markets. This includes software, biotech, technology, mineral exploration and so on.
Apply our sell-half rule. Selling half your holdings after you double your investment is a good strategy for any high-risk investment, but especially so for penny stocks. This can give you a clearer perspective on what to do with the other half of your investment. After all, if you are too slow to sell speculative stuff, your profits and even your principal can evaporate all too quickly.
We suggest staying out of marijuana pennies
Overall, we advise staying out of penny stock promotions. They attract the wrong kind of people. Stock promotion is a take-the-money-and-run type of business. Most successful entrepreneurs value their reputations, and want to build a profitable, sustainable business that can pay off for investors. So they generally go into some other line of work, and stay out of stock promotion.
These days, it’s faster and easier than ever to launch a stock promotion, thanks to the Internet. One recent “penny pot” investing stock scam almost seems like a business-school case study on launching online frauds. To avoid being taken in, it pays to read more, and to think before you invest.
There may be a lot of talk about which hot penny marijuana stocks to buy, but should they be part of a Successful Investor portfolio?
In general, penny stocks have lower trading volumes, or liquidity, and this lack of liquidity means it may be more difficult to sell a stock when you want to. They also suffer from large price fluctuations, so any bit of news will cause a penny stock’s price to rise or fall.
Ultimately, marijuana penny stocks should only be a very small part of any diversified portfolio, if that. Indeed, you should only buy them with money you can afford to lose.
Are marijuana stocks still on your “buy” list or do you think there are better investment options available?
This article was originally published in 2018 and is regularly updated.
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