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Is this Fledgling Marijuana Industry Safe for Investors?

risk and reward

In the few years that marijuana has been accepted in the United States, the booming marijuana market has given rise to many successful dispensary, retailer, and cultivation businesses. Some of these businesses are truly flourishing—like MedMen, which at the time of writing has managed to establish nineteen licensed facilities nationwide in New York, Florida, California, and Nevada, with fifty more licensed store in the works. They have quickly increased their employee count from a modest 45 in 2016 to a whopping 800 today.

There are countless success stories such as MedMen’s that have managed to ride the “green rush” into incredible wealth and national reach. The cannabis industry is exciting and promising, no doubt. And all of its potential has peaked the interest of investors across the nation. But is it really safe for investors? Could we be on the brink of another explosive industry, much the technology sector of decades past? Could this be an opportunity for eager, trail-blazing investors to buy in early and wait for untold riches to accumulate as the years roll by? Or is all of this excitement jumping the gun—perhaps this just another over-hyped, unremarkable market? After all, there are plenty of reasons to be wary of this new industry, and carelessness now could result in huge losses.

The technology sector analogy is no doubt attractive. Every investor wonders what it would have been like to get their hands on as much of Apple and Microsoft as they could as early as possible. Their portfolios would certainly have benefitted—but is there much of a reason to think that the cannabis market is anything like that? Sure, some businesses are doing very well right now. But most investors aren’t too happy about the serious volatility they’re dealing with. Some weeks, even double-digit price movements (good ones and not so good ones) are the norm.

Moreover, marijuana is still illegal on the federal level. That means the decision to or not to invest in the industry is going to be tied up with questions about legislation. That’s not to say that we should be worried about the government interfering with state legalization proceedings. Those fears have been largely diminished. But we have to keep in mind that this industry is stuck in a strange legal situation, one that greatly disadvantages it with challenging regulations that make interacting with banks very difficult. Though it’s a viable market, it’s also an incredibly cumbersome one, and any movement involves dragging quite a few government-issued ball-and-chains around.

The United States further disadvantages this industry by taxing the life out of it. The incomes of marijuana-based businesses are still heavily taxed, and since the product that they’re selling is federally an illegal drug, they aren’t allowed to have corporate income tax deductions. This can lead to incredibly high tax rates that can seriously hurt fledgling and established marijuana businesses if not destroy them entirely. And that’s to say nothing of some of the restrictive state laws that further bar these businesses from growth.

That said, despite the optimism of many investors, there are still plenty who consider this an over-hyped, volatile, and unremarkable industry. It’s much safer, they think, to stay away until more is known about its profitability. This comes as Colorado begins its nationwide legalization of recreational marijuana, as Germany’s medical marijuana market is quickly growing, and as other countries around the world begin relaxing medical marijuana laws. What long-term returns investors can expect is yet to be known.

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