A “Pick-and-shovel” strategy for marijuana stock investments is best for beginners

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Jumping into the deep end of the marijuana stock pool may not be the best alternative

There’s nothing wrong with wanting to make the biggest return on the smallest investment. Everyone would be happy to see that kind of performance. It’s easy to get caught up in the fervor of the marijuana stock market, especially when media outlets report three- and four-digit gains. However, for those wanting to get involved, this may not be the best solution.

The high volatility of the market should cause many to slow down, take a breath and analyze the markets better. Many are trying to grab a piece of the “green rush,” but employing a “pick-and-shovel” strategy may be a better solution, according to Wall Street heavyweight Ken Mahoney of Mahoney Asset Management.

Mahoney explains that the “pick-and-shovel” strategy involves investing only in those companies that have a well-established presence. Going after those companies that have no long-term record of profits and revenues and which can’t support their “outrageous valuations” can only lead to disaster.

The financial guru states, “When there is a lot of excitement about [marijuana legalization], I get worried because the valuations are stretched. People don’t do enough homework before they invest.” He adds that he has seen a number of smaller investors make poor decisions based on the hype and end up losing their investments.

Mahoney adds that now is not the time for smaller investors to leverage their houses in stocks such as Cronos, Aurora Cannabis, Tilray or Canopy Growth. Instead, he says the investor class should concentrate on those companies that are developing the underlying technology – real estate, fertilizing and packaging, for example – needed to manufacturer cannabis, instead of those offering the final product.

While these companies may not promise the returns that are being seen by some companies, they are more immune to the price fluctuations, making them a stronger option. It might be possible to see larger returns from investments in some of the other companies, but there is also a much greater risk of losing it all.