As strange as it might sound, there's reason to believe that companies developing mental health therapies based on psychedelic chemicals will make it big someday. With a drumbeat of impressive clinical trial results for using drugs like psilocybin in indications like treatment-resistant depression (TRD) building by the quarter, it's likely a matter of time until psychedelic medicines are commercially available.

Nonetheless, nobody's done it yet, meaning investors will need to be comfortable with significant risks if they choose to invest. There are a few compelling arguments in favor of buying shares of these companies now -- but there are also compelling arguments in opposition, so let's dive in.

It might be worth buying the dip

One reason why now's a decent time to buy psychedelics stocks is that there's an ongoing fire sale across the entire industry, thanks to the bear market. 

Leaders like COMPASS Pathways (CMPS -3.23%) and Atai Life Sciences (ATAI 9.24%) have seen better days. Shares of Atai are down by around 79.6% in the last 12 months, and shares of COMPASS are down by more than 61.3%. What's more, they might get even cheaper over the coming months if the market continues to fall.

And since both companies are still developing their first psychedelic therapy, buying shares in the near term will give investors the benefit of price appreciation if they report positive clinical trial results or favorable regulatory outcomes. As it's likely to take years before either of the pair has a chance to generate revenue, there isn't exactly a time pressure for investors to buy shares now, though.

Another reason why psychedelics stocks are attractive at the moment is that the legality of psychedelic compounds in the U.S. is slowly starting to shift in a direction that favors the industry. Right now, psychedelics are illegal federally. But, as of late 2020, the active component of psychedelic mushrooms, psilocybin, has been decriminalized in the state of Oregon. And a handful of municipalities, including well-known cities like Washington D.C., Ann Arbor, Maryland, and Oakland, California, have followed suit. 

As if that weren't enough, this summer, Congress saw bipartisan efforts to amend this year's National Defense Authorization Act (NDAA) to enable the Department of Defense (DOD) to spend money to study psychedelics for their utility in treating post-traumatic stress disorder (PTSD). If the NDAA passes as it is and it gets signed into law, it's plausible that psychedelics stocks will get a bump, but the far more important takeaway will be getting another piece of evidence that prohibition is finally starting to thaw slowly. 

There's no rush to invest

For most investors, lower-priced shares and some marginal progress with the legal situation aren't exactly the most compelling reasons to buy psychedelics stocks. More importantly, the level of risk associated with the industry is still sky-high, and that won't be changing anytime soon.

Psychedelics companies face three serious risks. The first is that their therapies will fail to be proven safe and effective at treating mental illnesses in clinical trials. That risk is largely shared with other biotech stocks, but it's actually elevated in this context because even basic details about best practices for treatment protocols are still undetermined. 

For example, COMPASS' lead program, COMP360, is a combination of psychological support from trained therapists and administration of a stabilized version of the drug psilocybin. Formulating a therapeutic molecule is a problem that many other biotechs have successfully navigated in the past, but developing an in-clinic psychedelic treatment protocol and a training regimen for the clinicians who will administer it is entirely new ground.

The second risk is that whatever psychedelic treatments companies devise will fail to be commercially viable even if regulators agree that they're safe and effective. COMPASS' model for COMP360 requires patients to visit specialized clinics that are staffed by highly paid professionals. It's unclear how much a course of COMP360 might cost, and it's also unclear whether public and private insurers would be willing to help patients.

And with that, we've arrived at the third major risk: Psychedelic therapies are still illegal for medicinal use in the U.S., as well as in much of the Western world. There's simply no way for any business to commercialize a psychedelic medicine until that changes, even if clinical trial results are favorable and the expected economic returns are massive. The recent progress on this front is nice, but it's so preliminary that it isn't enough to invest on.

So, at the moment, psychedelics stocks are highly speculative and will probably continue to be for at least a few more years. If the thoughts of losing all your money or needing to wait for years before your investment breaks don't scare you, invest away to take advantage of low prices. On the other hand, for most investors, it's probably a smarter move to invest where you can have a little bit more certainty of a positive return.