Though he may not currently hold the title as the wealthiest man in the world, Warren Buffett is arguably the greatest investor on the planet. Having begun with less than $10,000 in the 1950s, Buffett and his company Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) have created billions upon billions in wealth. According to Forbes, Buffett's net worth as of Feb. 25 was more than $86 billion.
Buffett's investment strategy has been pretty simple throughout the years. He looks for solid business models that could succeed regardless of how competent the management team is, and he holds those businesses for a very long time, taking advantage of the natural appreciation in value of high-quality companies. In fact, Berkshire Hathaway, which already holds dozens of companies in its portfolio and has purchased more than five dozen over the years, has $116 billion in its coffers ready to be deployed when Buffett, his right-hand man Charlie Munger, and the remaining investment team, find a business or businesses worth buying into.
Would Warren Buffett ever buy pot stocks?
This got me wondering: Might that capital ever be deployed into marijuana stocks? Before completely dismissing the idea, the cannabis industry does offer two aspects that Buffett would probably find very attractive.
For starters, the legal weed industry is growing at a lightning-fast pace, and it'll probably do so for years to come. Cannabis research firm ArcView is projecting that North American legal pot sales will more than triple between 2016 and 2021 to $21.6 billion. That sort of growth isn't going unnoticed by investors.
Building on this point, Canada also appears to be on the verge of legalizing recreational marijuana for adults by this coming summer. The Canadian government looks to have the needed votes in place, and it's already worked out a two-year tax-sharing agreement with all of the provinces. The hurdles for legalization are falling, paving the way for what could be a very profitable and legal marketplace for investors to buy into.
The second point, which is somewhat argumentative since the legal weed industry is still wet behind the ears, is that cannabis is a non-cyclical industry. In other words, even if economic growth slows or a recession hits, demand for recreational and medical marijuana should remain relatively consistent. Of course, getting accurate purchasing data on cannabis consumption is a challenge since it's been illegal for so long. Assuming the industry is indeed non-cyclical, it checks off a major investment box for Buffett.
Marijuana stocks offer too many flaws for Buffett to invest
However, the bottom line is that a few positives won't cancel out the negatives associated with the cannabis industry, in the eyes of Buffett.
To begin with, cannabinoid-based drug developers would be completely out of the question. The reason Berkshire Hathaway rarely owns drug developers is that Buffett and his team don't have the time or desire to devote to reading copious amounts of clinical trial data. With most cannabinoid-based drugmakers in the clinical stage of their development, that's no-go territory for the Oracle of Omaha.
Along those same lines, but representing an even bigger issue, is the fact that the marijuana industry doesn't have an established track record of success. Yes, sales growth has been screaming higher, but few marijuana stocks have demonstrated any earnings consistency. Most growers have been funneling all of their operating cash flow into expansion which, in many cases, has still left them critically underfunded. As a result, they've turned to bought-deal offerings to access capital, diluting investors in the process, and in many instances reporting full-year losses.
Along with preferring established businesses, Buffett and his investment team at Berkshire would shun the idea of having to purchase small-cap companies on the over-the-counter exchanges. Berkshire Hathaway's portfolio is filled with mega-cap and large-cap companies that trade on highly reputable exchanges like the New York Stock Exchange (NYSE).
And, of course, we can't forget that little tidbit about cannabis being partially or fully illegal in most countries around the world. There's virtually no way that Buffett is going to risk investing his and his shareholders' hard-earned money on a business model that isn't legal and doesn't have a clear path to long-term growth.
Hypothetically speaking, these marijuana offshoots may meet Buffett's criteria one day
Though it seems like a foregone conclusion that Buffett won't be investing in marijuana stocks until the industry matures and demonstrates it can generate consistent profits, there are two plays that could eventually make sense.
The first is the cannabis royalty model, highlighted by Cannabis Wheaton Income Corp. (NASDAQOTH:CBWTF) in Canada. Instead of maintaining grow farms and overseeing the production of pot, Cannabis Wheaton acts as an intermediary. Since growers are critically underfunded and struggling to get access to capital, a company like Cannabis Wheaton steps in and provides that funding so a grower can expand. In return, Cannabis Wheaton receives a percentage of production at a below-market rate. It then takes the marijuana it receives and sells it for market price, thusly pocketing the difference as profit. The royalty model is highly capital intensive in the early going, but with an average internal rate of return of 60%, it could be incredibly profitable if Canada follows through with a bill to legalize recreational weed.
Buffett might also be attracted to the marijuana breathalyzer movement. There's no disputing that using cannabis can impair drivers. The issue is in finding a suitable way for law enforcement to test drivers to determine if marijuana consumption is impairing a driver to the point where it's an arrestable offense. Complicating matters is the fact that THC, the psychoactive component of cannabis, can stay in the body for weeks after use. Furthermore, with alcohol, there are clearly defined laws on blood alcohol content for law enforcement officers to follow. Those guidelines don't exist for marijuana use.
The solution might just be new devices being developed for law enforcement and employers that can test THC content and/or recency of use by a breath sample. If marijuana becomes legal in an increasing number of countries, this breathalyzer equipment, assuming it can be perfected, would become a staple product for law enforcement, and possibly employers.
Again, this is all hypothetical at this point, but these are branches within the marijuana industry that could have what it takes to lure a whale like Buffett to invest.