The Major Mistake Marijuana Stock Investors Are Making Right Now

Marijuana stocks have inspired a new generation of investors to look more closely at the stock market, and the budding industry has seen a lot of activity recently. In just the past year, the legalization of recreational marijuana across Canada has been a trigger point for explosive growth among some of the largest cannabis companies in the world. Ongoing efforts to make pot legal across the U.S. have also drawn attention to the industry, leading investors to try to identify those companies most likely to take full advantage of the coming opportunity in cannabis.

Yet over the past month, key marijuana stocks have seen huge declines, and that’s left many people frustrated with the sector. As cannabis investors try to make informed decisions about what to do in response to the recent drop, though, many are making a big mistake that’s unfortunately all too common among stock market participants more broadly. All it takes to avoid these errors is some perspective that can help you reset expectations and get yourself focused on the more important aspects of investing…

Why are marijuana stocks falling?

The declines that marijuana stocks have suffered over the past month have come as a surprise to many investors, not just because of the size of the drop, but also the breadth of the weakness across the industry. Two cannabis companies that have attracted valuable partners in the consumer goods space, Canopy Growth (NYSE:CGC) and Cronos Group (NASDAQ:CRON), have seen their shares drop roughly 20% in just the past month. Meanwhile, two others that have thus far largely remained independent, Aurora Cannabis (NYSE:ACB) and Tilray (NASDAQ:TLRY), are also down sharply, with Tilray’s losses approaching 30% since early May.

ACB Chart


Those who follow the industry day in and day out have come up with plausible reasons for these declines. Some pointed to overall stock market weakness in May as having a negative impact on marijuana stocks, arguing that speculators who helped drive share prices in the space higher pulled back from the sector as major market indexes fell. Others focused on marijuana earnings season, noting that although Aurora, Tilray, and Cronos all posted solid revenue gains, only Cronos was able to make money, and its profit came due to the accounting rules surrounding the investment that tobacco giant Altria Group has made in the pot producer.

The big picture

It’s always difficult to pull yourself out of a short-term mindset, especially when times are tough. Yet especially in an industry that’s really only come into its own over the past year or two, you have to think long term if you want to keep things in perspective and make informed choices about how to handle the inevitable ups and downs.

To see how a longer-term perspective can change your thinking, consider what happens when you pull back from the chart above and instead look at performance since last summer…

Continue reading at THE MOTLEY FOOL