The cannabis industry continues to attract numerous investors. Both experienced and inexperienced. This is after a number of legalizations in the U.S. and a rather friendly approach by the Federal government.
However, with inexperienced investors joining the cannabis bandwagon, many are bound to lose their investments due to certain mistakes such as failure to carry out due diligence.
This article aims at shining a light on these mistakes to alleviate potential losses.
- Little to Zero Diversification
Many beginner investors in the marijuana stock market invest in a maximum of two companies. This is an understandable move from first-time investors due to limited funds to cater for multiple commissions.
With over 600 companies in the same space, this is a risky strategy not only in the cannabis industry but also in general stocks.
First, off because the companies in the cannabis industry have inadequate operating experience. Therefore, it’s important to split your portfolio in at least over 18 stocks. For example, if one stock, which carries all your investments, suffers 50% in losses, then it means to recover, it must double its profits.
This may be a difficult task considering many cannabis stocks work with convertible notes to fund almost their entire operations. With this type of financing, stocks suffer immense downward pressure since this debt is repaid at a certain discounted stock price. If the debt holder sells their stock at the discounted price a number of times, the company may die.
- Excess Diversification
Yes, this can also pose a danger to your portfolio. While diversification will protect your portfolio from uncontrolled losses, excess diversification can be risky.
This is how.
You may have 25 companies under your watch, but if they’re all posting negative returns, then you’re bound to lose. Again, many cannabis companies in the market aren’t as experienced, thus it’s possible to make significant losses.
- Sole Reliance on Press Releases
Due diligence is an important step every stock investor must carry out. You can do this by subscribing to a message board where you can get advice and information regarding specific cannabis companies such as OWC Pharmaceutical Research Corp.
Another way is by following press releases. However, this move is risky and a heavy reliance on press releases can be “fatal” to your portfolio. Instead, consider digging into the company’s filings. For this, you must tread with caution, especially with companies that don’t file with the SEC.
The reason why you shouldn’t rely on press releases as your primary source of information is, they are often bullish. On the other hand, company filings offer a more balanced report. Doing so allows you to scrutinize important information such as litigations, the financial position and compensations among others.
However, there’re certain companies which may be dodgy with their filings. One is OWC Pharmaceutical Research Corp which issued a rather bullish press release in 2018. Others include PotNetwork Holdings which doesn’t file with the SEC and the American Cannabis Company which failed to file with the SEC before the mid-April deadline and hasn’t done so thus far without any explanation.
In conclusion, as an investor, you must be careful when investing in cannabis stocks such as OWCP Stock. Do your research and required due diligence before investing in order to reap maximum benefits.