Marijuana legalization: It's the one topic that can revive pot stocks like nothing else. The hopes of the U.S. pot market opening up in the near future can captivate even jaded investors who have lost big on the cannabis industry in recent years.
The sheer market potential is what can have investors dreaming of the possibilities of long-term gains by getting in before things take off. That's why any news, any hints, and any suggestions that marijuana legalization is on the horizon can often send pot stocks soaring. The fear of missing out (FOMO) is just too great.
President Joe Biden recently announced he would pardon people convicted of simple marijuana possession. And the Drug Enforcement Agency has confirmed it is reviewing an earlier recommendation of rescheduling cannabis so that it's no longer classified the same as heroin and other dangerous drugs.
Those are encouraging developments, but you shouldn't get caught up in the hype. Here's why you shouldn't expect marijuana legalization this year.
Legalization is a long and complicated process
When it comes to government, even simple issues and bills can take a long time to pass. Now imagine one as significant as marijuana legalization.
Not only would the federal government need to consider the sale and regulation of marijuana, but there would also be issues -- such as taxes, advertising limits, minimum ages of consumption, public health and safety, among others -- that it would need to take into account and sort out before legalization becomes a realistic possibility.
It's a process that could take considerable time and would require many debates before it could end up happening. Addressing all those complex issues and also getting a bill passed in both the House and Senate before the end of the year would undoubtedly be a best-case scenario for the industry. It would also be an improbable one.
It was October 2022 when President Biden asked agencies to review marijuana and potentially recategorize the substance from its current Schedule I classification. There's no certainty that any change will take place. And that is a much less complex decision than outright legalization.
Betting on marijuana stocks based on legalization expectations is risky
For investors, investing in marijuana stocks solely for the sake of expecting legalization can be incredibly risky. If nothing materializes and hopes fade about legalization, the bullishness will fade as well. And that can lead stocks back into a tailspin.
A great example of this is Canopy Growth (CGC 2.41%). For years, the Canadian pot producer has been hyping the opportunities in the U.S. cannabis market. In 2019, it even entered into a contingent deal to acquire multi-state marijuana company Acreage Holdings.
That deal remains pending because of the federal ban in the U.S. on pot, and so it can't be completed yet -- otherwise, Canopy Growth could get kicked off the Nasdaq.
At the time, investing in Canopy Growth might have seemed like an amazing idea. The forward-thinking company was positioning itself for some potentially massive gains once legalization took place in the U.S., giving it a head start on the competition.
The problem is that legalization hasn't taken place. And it still doesn't appear imminent. If you invested in Canopy Growth in April 2019, when the deal was announced, your investment would be down a staggering 99%.
Yet, despite these painful lessons, many cannabis investors can't help but hold out hope that perhaps this time, this year, things will be different.
Is the cannabis industry too risky to invest in?
For the average investor, the cannabis industry is probably too risky to consider for a portfolio. The exception would be if you have both a high risk tolerance and the patience to potentially wait several years.
Marijuana legalization doesn't appear inevitable today, but there's certainly the possibility that it could happen in the future. Predicting when is next to impossible, and that makes the idea of investing based on legalization incredibly dangerous, particularly for those who aren't willing to wait years.
Cannabis stocks aren't suitable for most investors, and unless you brace yourself for what's likely to continue to be a bumpy road, you are better off avoiding the industry entirely.
