by Cynthia M. Clark, CFP(R), JD
Weed seems to be on everyone’s lips today – pun intended. 🙂 As a Certified Financial Planner professional, I have to stay on top of financial information. And, as you know, financial planning and estate planning go hand-in-hand; you can’t do one without the other. So when I read this fascinating article about investing in marijuana-related companies, I thought I’d share it with you.
According to the author, most pure plays in cannabis companies are penny stocks – and the companies are bleeding money. So you’re not going to find a nice weed ETF or mutual fund for your 401(k). Here are some of the reasons the author believes it’s hard to make money by investing in Mary Jane:
- Federal law. Marijuana is still a Schedule I drug under federal law – like heroin and LSD. That presents certain problems, such as not being able to be transport it across state lines.
- Banks. Because of illegal status of the product, banks stay away from pot-related companies. In 2016, only 300 banks out of the 12,000 in the country would work with cannabis companies. That means no credit cards. And it’s estimated that 70% of all weed-based businesses don’t have bank accounts! Hmm, all-cash businesses…no bank accounts…anyone see a potential problem for investors?
- Insurance. The illegal status of the product makes insurance companies wary of them, too. Typically, farmers buy crop insurance to insure against losses due to natural disasters. But insurance companies won’t insure pot plants. CA produces about 75% of the pot in the US. What effect do you think the CA wildfires have had on the marijuana industry?
- Taxes. Once again, the federal prohibition against pot affects weedpreneurs. IRS rules won’t allow pot-related businesses to deduct operating expenses, such as rent, payroll, etc., so, unlike other businesses, they’re taxed pretty much on gross sales. And states such as CA impose hefty state taxes on top of that. So, instead of an effective tax rate like most businesses have of about 30%, cannabis-based businesses have an effective tax rate of about 70%!
- The owners.“This is an industry that is run by former illegal drug dealers and users, so you have to be very careful,” says Jacob Bell, co-founder of Patient Relief of Ohio in Cleveland and an early marijuana investor in California.
While the article doesn’t reference it, I’ve noticed other articles expressing some environmental concerns about the industry. This Mother Jones article claims U.S. pot farms are “anything but sustainable and organic.” And this article claims that rat poison from CA pot farms is endangering the federally-threatened spotted owl. Bad PR and the potential for huge fines for growers isn’t conducive to profits.
So, direct investment in the pot industry is pretty sketchy right now. But the author of the article suggests that as more countries climb into the weed wagon, some of the big “vice” companies may start investing in them, so buying their stocks would indirectly allow you to invest in cannabis companies.
I hope you found this as fascinating as I did. And if you decide to invest in the wild, wild world of weed, good luck!
Other articles you might find interesting: