Penny Stocks For Dummies
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Investors engaged in the recreational marijuana mania had forgotten an important point: With legalization and widespread acceptance of recreational marijuana, the big companies will enter the market. As soon as that happens, all tiny and marginal businesses will be crushed.

This fact should not surprise anyone — this exact scenario has played out many times in the past, and larger, more established corporations have taken over smaller markets. The early and tiny players in the space get squeezed out. As soon as a new business line shows any staying power, big corporations take action.

This wouldn't necessarily be the case in a different type of industry, if intellectual property and patents could help protect the smaller businesses. However, there is nothing proprietary about marijuana, and as mentioned, the barriers to entry to the space are about as high as a lemonade stand or a T-shirt company.

Massive multi-billion-dollar corporations are watching very closely, and when the social shift has gone far enough, and the kinks are worked out in terms of legality, banking regulations, and reporting requirements, they'll step in. Companies such as the following did exactly that:

  • Vitamin and supplement providers
  • Pharmaceuticals (especially from the medical marijuana standpoint)
  • International conglomerates (where cannabis is already accepted)
  • Cigarette businesses
  • Alcohol companies
  • Cigar sellers
  • Franchised pubs, bars, and dance clubs
  • Energy drink and soft drink purveyors
Most people laugh, but it isn't unheard of for well-known businesses to be selling pot, if there is profit to be made and it won't reflect poorly on them from a social standpoint. With every shift in social direction, there will be resulting adjustments to the underlying businesses and the products and services they provide.

There will eventually be significant profits from any growing industry, but it's rarely the smallest of business that capture the profits. This has been proven repeatedly throughout history. That's why most of the 1,800 automobile manufacturers are worth nothing, and more people lost fortunes chasing the California gold rush than made any meaningful profits.

In terms of legalized marijuana, don't think that because the big players have yet to act, they aren't watching very closely. They're waiting for certain events:
  • Social shift: If the nation becomes more accepting of recreational marijuana, many business opportunities will instantly arise.
  • Regulatory clarity: Many of the legal considerations still have yet to be worked out, and until they are, this will act as a major point of issue for any business planning on operating in the space.
  • Current trailblazers: All eyes are on Colorado and other early-adopter states. Organizations and individuals are very curious to see how the legal recreational marijuana "experiment" plays out.
  • Proof of concept: For some pot businesses, there won't be much money to be made, while for others the potential windfall might be extreme. The best way to squeeze cash out of the cannabis concept is not yet known, but businesses will make sure to figure it out soon.
  • Market demand: The idea is popular, and there will be customers. However, the industry is so new that no track record of market demand over time exists. Is pot a new normal, or will people lose interest after four years?
  • Reporting and bureaucratic requirements: Many of the legal considerations still have yet to be ironed out. Larger corporations err on the side of patience when facing dealings such as these.
  • Banking clarity: The banks will figure out if and how they'll support marijuana businesses eventually. However, since cannabis is still technically not legal nationwide, the banks are in a difficult position when it comes to financing some of the underlying businesses. Without the banks, big business will not touch the industry.
As soon as the details of many of these issues are clarified, and profit potential presents itself, the largest companies will step in to collect their part.

Despite warnings about the pot penny stock mania, and the rise of some pretty financially suspect businesses in the space, there were still those who made money riding the speculative wave. You could buy shares for $1 that were worth 3¢, and then sell them at $50. Those shares are still, and always were, worth only 3¢, but the mania doesn't care. Great move if you get out in time.

The problem is that the fall usually occurs almost in an instant, and the pot craze was no exception. Most people bought at the peak, resulting in widespread losses to the vast majority.

Playing around with any stock market mania is a dangerous game, and certainly only for the most experienced who understand that they're buying a very low-quality business.

They must also understand the attention span of the media, which is always going to move on to new stories when the old ones get played out — the Iraq War, Occupy Wall Street, 3D printing, Russia's invasion of Crimea, the missing Malaysian airplane. The constant media coverage is absolutely necessary to keep fueling any stampede, and when that coverage fades, so does the mania.

These investors should understand that the only hope for the shares to increase in price is for them to get lifted by enough investors who don't know any better. In any mania, the ones who profit will be those who keep their eyes on the computer screen and their fingers on the eject button at all times.

About This Article

This article is from the book:

About the book author:

Peter Leeds, also known as The Penny Stock Professional, is the publisher of Peter Leeds Penny Stocks, a popular financial publication with over 50,000 subscribers. He is also the author of Invest in Penny Stocks.

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