Marijuana Investing for the 99 Percent
Marijuana and mutual funds are not concepts usually found in the same sentence. Marijuana investments are notoriously volatile. A mutual fund, on the other hand, is the sort of stodgy vehicle that middle-aged people use to build retirement savings, only slightly sexier than an annuity.
The next wave of marijuana investment funds, including Mentor Capital, Inc. and Greenstead Growth Fund, rolling out next spring, are hardly fighting over the $50 per paycheck investor, but they have a slightly more retail feel than the early angel and private equity money.
Will middle-class Mary have an opportunity to get in on the green rush soon? Penny stocks are affordable, of course, but so are lottery tickets and buying them hardly amounts to an investment strategy. The still non-existent marijuana mutual fund offered as part of a large menu of funds for 401(k) plans or IRA investments may be a better bet for the future.
Entry Barriers for Small Investors
Small investors face two big issues. The first is the minimum needed to play. Private equity and angel investing are limited to high-net-worth individuals. A businessperson who wants to invest sweat equity often faces enormous startup costs. Someone who wants to grow medical marijuana in Illinois, for example, must pay an application fee of $25,000, plus an additional $200,000 if a permit is awarded while holding $2 million in escrow.
The second issue is risk. Some companies do very well, especially in ancillary businesses. However, last spring the Securities and Exchange Commission suspended trading in five marijuana stocks for issues such as reporting inaccuracies, unlawful sales of securities and market manipulation. A downturn can be especially painful for the smaller investor.
Mutual Funds to the Rescue
As a simple proposition, mutual funds attempt to address both these issues by pooling small investors’ resources and diversifying risk. They give small investors access to professionally managed, diversified portfolios of stock, bonds and other instruments that would be difficult to assemble with a small amount of money. Rather than owning individual assets, each shareholder owns one or more shares of the fund and participates proportionally in the entire fund’s gain or loss.
Most mutual funds own the stock of publicly traded companies, although some also provide access to private companies, as many marijuana enterprises still are. There is a rational relationship between investment risk and reward, and because many mutual funds are managed conservatively, the potential for gain is more modest than it may be with individual stocks. Conservative management of somewhat risky assets seems like a good compromise, in any event.
Long Term Savings Plan
The delicious irony of marijuana investing is that it might make a lot of sense for the stodgy chore of long term financial planning, not for aging hippies, but their button-down children. If assumptions are correct about the potential for long-term growth in the industry, 30 years of well-managed investment could really pay off, even in the face of current risks. Marijuana mutual fund investing as part of a retirement plan will not make the difference between rich and poor, but may make the difference between all right and very comfortable.
The problem is that the vehicle to permit the small investor to participate in the green rush still has to be created. It hardly seems like an insurmountable task, not a matter of whole scale invention. It may simply be that the market has to ask for it.