In turn, I expressed my opinions to them for what they are worth  — not much.

First, currently, no pure cannabis stock play exists in the nationally traded markets such as NYSE or NASDAQ.

Most of the companies that have “hands-on” business models are prevented from listing on the national exchanges because of the pesky Federal Controlled Substance Acts classification of cannabis as a Schedule I substance. So in essence, the trading of a pure cannabis stock venture, as of today, would be considered investing in a federally deemed illegal enterprise.

Currently, there are companies that deal with cannabis in an ancillary way — such as social platforms, or software companies which provide Cannabis Industry-specific goods or services. But the key here is that those companies do not touch cannabis, they merely provide support services, like Levi Strauss did in 1849 California for the Gold Rush crowd.

Publicly traded cannabis companies are all about high risk

There are smaller companies that are listed on the OTC market or pink sheets. These stocks are not meant for your IRA or long-term investments. Rather, stocks in any sector that fall into this category are risky, at best, and should only be viewed as speculative investments. This means that the investor is willing to sustain the risk of losing their entire investment without endangering their overall financial well-being.

One of the salient differences between stocks listed on national exchanges and those that are OTC or Pink Sheet listed is the level of reporting required by the SEC, the U.S. Securities & Exchange Commission.

On national exchanges, as you would imagine, the requirement for listing involves much more stringent reporting, disclosure and transparency. Those SEC filed documents will allow one to conduct their due diligence before making any specific investment decision.

As to individual cannabis stocks, this is a risky investment proposition today. Now, don’t misunderstand; to achieve greater profit, one must assume greater risk. That’s simple economics.

In other words, in order to make an omelet one must break some eggs. That’s basic business. But as of today, with cannabis still remaining a Schedule I substance on the federal level, my opinion remains that investments in the cannabis sector should only be reserved for those with a high tolerance for risk.

I do believe that with legislative and electoral victories poised to occur in the cannabis sector in 2016, one may enjoy the effect of a high tide raising all boats scenario, with respect to any particular cannabis stock. However, after the “irrational exuberance” period, one will be left to truly understand the value proposition and business plan of any specific cannabis company.

Again, this is much more of a short trading strategy than a long-term investment approach.

There are other ways to invest in marijuana businesses

Now, there is another way to potentially invest in the Cannabis Industry which involves collective investment.

Many firms are seeking to create privately offered funds through fundraising campaigns, or Reg D private placement offerings. So in this case, there is an investment adviser who seeks out, let’s say, 10 cannabis companies to place in a portfolio. Units or interests in the portfolio are then offered to accredited investors who should be provided a private placement memorandum or disclosure document. These Portfolio Funds are not listed, nor traded, on any public exchange.

Generally, the investment adviser will not be overly concerned with the performance of any individual company in the fund’s portfolio. The investment adviser is agnostic as to any individual cannabis company’s performance. Rather it is the performance of the entire portfolio, taken as a whole, which is of the most concern.

So, even if only two of the 10 companies in the portfolio hit home runs, and maybe a single or two from some of the other companies, the winners should outweigh the negative performance of the other six non performing cannabis companies. It is essentially diversifying risks amongst sectors and individual players in the Cannabis Industry. This is the responsibility of the Fund’s investment management team.

Of course, this only happens provided your investment adviser has done its job satisfactorily — namely vetting and conducting due diligence on individual companies included in the Fund’s portfolio. You, as an investor, also have an obligation to conduct due diligence on the Cannabis Investment Fund itself before entrusting your hard-earned capital with it. Generally, this should present a better risk balanced methodology to invest in the Cannabis Industry since someone else, who is being very well compensated, is undertaking this obligation on your behalf.

A hypothetical cannabis investment

So, for a moment let’s turn our focus to a hypothetical privately offered Cannabis Industry investment fund called “Black Morgue, L.P.” The first thing you would want to do is check the financial regulatory sites to see if  Black Morgue is appropriately licensed, to see if there are any disclosable events concerning the Black Morgue Fund or its principals, and to see if there are any other potential red flags.

Assuming that Black Morgue is properly registered, (and it very well may not be registered, in which case any investment therein is essentially a “put” option) and no other red flags occur, then it is time to look at the benefits and risks of the offered cannabis investment fund, Black Morgue.

How many companies has Black Morgue invested in?

There is a concept called “concentration.” This means if you were trading in a stock fund and the only stock held in the Black Morgue was “Microsoft,” then the fund would be 100 percent concentrated in one stock and its correlation (a measure of how one particular stock moves in comparison to another stock or index) and return profile would be perfectly aligned with the underlying Microsoft stock (minus the investments adviser’s management, brokerage and incentive fees).

So the performance of that fund would be solely dependent on the performance of the one company — Microsoft — regardless of any other stock trends or other industry participants such as “Oracle” or “Cisco.”

The industry diversification issue

So cannabis investment funds with three (3) or fewer investments in cannabis companies in their funds are subject to concentration issues and create a much riskier potential positive return scenario because there is no fund diversification of performance exposure.

In addition to the concentration issue, there is also an industry diversification issue, which in the Cannabis Industry means that there are cultivators, processors, edible manufacturers, security providers, seed-to-sale tracking, POS companies and other ancillary businesses such as social platforms.

So even if Black Morgue has three companies it is invested in, if all are in the edibles category, there is a concentration of risk from only having exposure to one sub-group of the cannabis sector. So successes in processing or seed-to-sale companies will not be reflected in Black Morgue’s return profile.

Should there be state legislation passed regarding limiting the sale of  “edibles,” then both you, as an investor, and Black Morgue, will be very disappointed, even if the rest of the Cannabis Industry is thriving and unaffected.

Next, and finally, perhaps the most important factor, does Black Morgue have any experience in this cannabis sector? Just because someone has used cannabis doesn’t mean they know how to properly vet and make well-reasoned Cannabis Industry investment decisions.

Does Black Morgue have a real sense of the management of the company(s) they are investing in? How well does Black Morgue know the history and interrelations of a cannabis company’s current management and the associated issues regarding the need for capital to implement a business plan?

  • Does Black Morgue understand the investment premise of placing capital with a company that is unable to execute its business plan?
  • Does Black Morgue understand the true financial valuation of the Cannabis Industry company, or has the Cannabis Industry company produced inflated economic projections based on faulty assumptions of the proposed business strategy?
  • Does Black Morgue have a competent attorney to protect the Fund’s interests, or is that attorney easily bamboozled by a non-forthcoming Cannabis Industry company’s management team?

Do your homework

So, it’s important for you, my friends, to undertake your due diligence and homework before seeking to invest your speculative capital in the Cannabis Industry. This is true whether you seek to accomplish such through individual stocks or through investment advisers, like Black Morgue, since as the wise King Solomon stated in biblical times, “A fool and his money are soon parted.”

So, please be careful before inhaling the cannabis investment sales pitch.