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10 things I learned trading weed stocks as a rookie investor

Last Updated Jan 14, 2019 at 1:09 pm EDT

By nature I’m financially conservative. I’m a saver. I don’t like spending money and I certainly don’t like losing it. My father was the same, as was his father. Short arms and deep pockets. It’s likely genetic. But despite my DNA, I took what some felt was a spectacular risk: I invested a significant portion of my hard-earned savings into marijuana stocks long before legislation had even passed to clear the way for the recreational market. Like many, I was lured by what I considered a once-in-a-lifetime opportunity. Before I entered the space, I was a savings account and GIC kind of guy. Boring, but safe. That all changed in 2016 when I bought my first Canopy Growth shares. Other marijuana stocks soon followed. I was about to take a crash course in volatility. This was investing on steroids, but I was still the skinny kid getting sand kicked on him at the beach. I made some good trades. I made some bad trades. I celebrated. I cursed myself. Grey hairs accumulated. This is what I learned trading weed stocks as rookie investor.

1. Have a game plan.

Before you enter the insanity of the weed space, it’s important to have a game plan. Are you in it for the long run? If you’ve doubled your money, should you sell? If you buy a stock and it drops significantly, should you buy more and average down, or cut your losses? Not every stock will be subject to the same plan. You may want to hold an industry leader like Canopy Growth Corp. (TSE:WEED) for a longer time frame and unload relatively riskier stocks after gaining a certain percentage (or sell at a small loss, rather than a big one). But if you don’t hatch at least a rough plan before you buy, it will be difficult to make prudent decisions, especially in a volatile sector that experiences seismic shifts and swings that at times defy logic and can instill an inexperienced investor with the euphoria and fear that fuel bad decisions. Sticking to your plan is easier said than done. As Mike Tyson once said, “Everyone has a plan until they get punched in the mouth.”

2. If you’re long, look away.

There’s a lot of different ways to play the marijuana sector. Some “buy the rumour” and “sell the news” when a company issues a bullish release or cash out for a quick hit when a sector rally drives one of their recently purchased stocks beyond expectations. But if you’ve done your research and chosen a stock as a long-term investment, you should avoid incessantly checking your portfolio. Yes, you should keep your ear to the ground and pay attention to developments in the industry. You may even want to do a daily check in. But monitoring the minute-to-minute fluctuations of the stock can drive you bonkers and lead you to abandon your plans. I fell victim to this. When I first purchased Canopy shares in 2016, I told myself no matter what, I was holding this one for the long haul. Other stocks could come and go, but this was the top dog and I would cling to my shares through thick and thin because I believed in the company and its future. But I became both thrilled and terrified as I watched the stock rise and plummet with frightening regularity. One day, in a flash crash likely triggered by stop losses and algorithms, I sold most of my Canopy shares at around $26, terrified that I was about to watch all my lovely gains evaporate. The crash was short-lived and was quickly followed by an even bigger recovery. I was then reluctant to buy back at prices significantly higher than I had sold for. I comforted myself with the knowledge that I had secured a profit and could deploy some of that money into other companies I felt were undervalued. But in the end, I would have been better off holding all of my Canopy shares as I had initially planned. If I wasn’t obsessively checking the stock price, I would still have all my shares, which have since soared as high as $74.45.

3. Take profit for peace of mind.

While a “buy and hold” strategy can avoid the many perils and pitfalls of trying to time the market, there are times when taking profit off the table is not only wise, but it can also be essential for peace of mind depending on your personal tolerance for risk. The wild swings the cannabis space has seen is enough to rattle veteran investors, not to mention relative newcomers. There may be an instance where you’ve purchased a stock and watched in awe as it rockets to the moon. You may sense that it’s too good to be true and can’t last (probably right), but you still want some exposure just in case it continues to run. There’s no shame in cashing out some profit, or even your entire initial investment, and letting the rest ride. In the case of the latter, you are now essentially playing with house money. You may lose out on some long-term returns by decreasing your position, but you’ll likely sleep a lot better at night. And if the sector corrects substantially and you still believe in the stock, you can use some of that cash to buy more shares back at a relative discount.

4. Don’t get cocky.

As Tony Montana once said, “Every dog has its day.” And indeed, anyone can have a nice run of luck in the marijuana sector or impeccable timing with a stock purchase. I bought Namaste Technologies (CVE:N) at 33 cents and felt like a genius as it soared beyond $3 in a matter of weeks. I sold chunks off along the way and beamed at my good fortune and undeniable intelligence. Suddenly I was an expert. I dreamed of quitting my job and becoming a day trader. I doled out advice. This was easy! NEWSFLASH: It’s not. With my newfound overconfidence I began making more trades than I normally would and risking money that I shouldn’t have. As you may have already guessed, I was soon humbled. And you will be too if you get too cocky.

5. Be cautious of online advice.

New investors will often turn to online forums like Reddit, StockTwits, and Stockhouse to not only track investments, but also to learn investor lingo, stay up to date on developing news, and gauge public sentiment on certain stocks. I admit I’ve learned a lot by perusing such forums and I still visit them daily. But tread cautiously. For every well-intentioned post aiming to share some pertinent information or hard-gained wisdom, there are dozens of pumpers, bashers and trolls spreading misinformation and attempting to manipulate your emotions. Reading these threads can become obsessive and can fill you with equal measures of irrational fear and exuberance — either of which could lead to hasty errors that eat away at your investments. When approached discerningly, online forums can be quite helpful. But if you’re taking trading advice from a stranger on the internet, don’t be surprised if it leads to disappointment, which leads us to…

6. DYODD.

While spending far too much time on the aforementioned forums, I often saw “DYODD” and learned it stands for Do Your Own Due Diligence. This basically means what it says: Don’t put your money on the line without doing your own research into a stock. Everyone loves a hot stock tip, but they are often met with a cold splash of reality when the “next big thing” tanks. With that in mind, it can be difficult to research and pick a marijuana stock by analyzing traditional fundamentals because…

7. Valuations don’t make sense.

Canopy Growth reported a fourth-quarter loss of $61.5 million, or 31 cents per share. As of the publish date of this article Canopy has a market cap of nearly $15 billion. That may not make sense to you, but valuations in the marijuana space are all badly out of whack for the simple fact that the recreational market does not yet exist. Trying to judge a weed stock using fundamentals like price-earnings ratios (P/E) will leave you perplexed at their apparent overvalue. When it comes to weed stocks, you’ll need a crystal ball to go along with your calculator, as company value is largely speculative and based on projected future sales. Major players are all in expansion mode, spending millions to get ready to meet the demands of impending legalization. But there are still ways to separate the potential winners from the losers. Provincial supply deals are a good place to start. How many does the company have, and how big are they? How much grow space does it have, and how much will it have when its expansion plans are realized? An important statistic is the cost of production. How much does it cost the company to produce a gram of weed? Hydropothecary (TSE:HEXO) for example, has a marked advantage in this area because hydro rates are significantly cheaper in Quebec, where the company is based. Another possible indicator of future profit is international exposure and expansion. Laws concerning marijuana, especially for medical use, are changing around the world, and companies that gain a foothold abroad will have new markets to penetrate. And maybe most significant are joint ventures and partnerships with alcohol, tobacco and pharmaceutical companies. Constellation Brands’ $5-billion investment in Canopy set off an industry-wide bull run. Molson Coors has also struck a deal with Hexo, and rumours that alcohol giant Diageo and soft drink king Coca-Cola are both preparing to enter the space has kept investors on edge and guessing which licenced producer will land the next big deal.

8. Don’t be a BOZO and get sucked in by FOMO.

I felt like an out-of-touch parent scanning his teen’s text messages when I first began reading online stock forums. One acronym that kept popping up was FOMO, which stands for Fear of Missing Out. FOMO is a powerful motivator, but it can cause you to make foolish purchases at precisely the wrong times. Usually when you buy a stock because you’re afraid of missing out, you’ve already missed the bulk of the run-up. You read about others making huge gains in a stock and talking about the boats they are going to buy, and you want in as well. You’ve sat on the sidelines and been too cautious and everyone else is reaping the rewards. Then, as if you’re cursed, the second you hit “buy” the stock starts selling off. You’ve just been victimized by FOMO. FOMO is closely related to YOLO, You Only Live Once, which prompts people to recklessly throw money into penny stocks and long shots with the faint hope they’ll strike it rich. Both FOMO and YOLO are driven by emotion, and emotions and the stock market are disastrous dancing partners.

9. Don’t panic.

When money is on the line, telling someone not to panic is like a flight attendant telling passengers on a nosediving 747 to remain calm. But it still must be said. It didn’t take long after I made my first pot stock purchases for me to realize that the sector’s fuel is fear. Brief periods of consolidation are book-ended by both panic buying and panic selling. Such volatility is a day trader’s dream come true, as they can play the stock both ways. But most of us mere mortals don’t have the savvy, skills or time to take full advantage of the roller coaster ride. All the average person can do is try to stay calm and make measured decisions that avoid the herd mentality. If you’re buying or selling in a state of panic, it’s usually the wrong move.

10. Don’t look back in anger.

In a panic, I sold OrganiGram (CVE:OGI) for a loss when it was embroiled in a pesticide scandal. It has almost tripled since then. I abandoned my game plan and ditched most of my Canopy shares long before I planned to. They have since nearly tripled. Those are just a few missteps brought on by letting emotion and fear cloud my thinking. Like many rookie investors, I’ve learned the hard way. But dwelling on mistakes gets you nowhere. Don’t look back in anger. Start researching and getting ready for the next opportunity!