Aug. 28, 2018, 10:04 a.m. EDT

How to potentially become a marijuana millionaire, albeit carefully

There is money to be made in the burgeoning cannabis industry. But investors in marijuana stocks need to understand how to invest in them for the long haul

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By Nigam Arora

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• Professional-investor (smart money) flows show selling into the strength. Segmented money flows provide investors an edge. Smart money flows were a major contributor to The Arora Report’s accurate signal to sell Canopy Growth at the previous peak. We provide segmented money flows on 12 cannabis stocks. To learn more, please read “11 marijuana stocks’ money flows show which are investor favorites.”

• As a group, these stocks do not move with the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.56% , S&P 500 /zigman2/quotes/210599714/realtime SPX +0.07% and Nasdaq 100 /zigman2/quotes/210598364/realtime NDX -0.56% . This can provide important diversification.

Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.

How to make millions

The observations above lead to the following 11 pointers about making millions in marijuana stocks.

• Expect these stocks to be very volatile.

• Investors may want to take advantage of the volatility by selling into the strength and buying into the weakness.

• Those with a long-term horizon can use the technique of trade-around positions that we have been successfully using to often double returns. The concept is to accumulate core positions on significant weakness and then trade around those core positions with shorter time frames.

• The most important pointer is to not fall victim to “pump and dump” schemes. In such schemes, certain stocks are heavily promoted. The stocks run up on the promotions. Those promoting the stocks buy them before they start pumping and then dump them when mom and pop start buying them.

• Be especially careful about investing in offers via emails that promise quick riches.

• The path to making significant profits in cannabis stocks is most likely to be a difficult and torturous one requiring significant skill and proper guidance. Investors are likely to be better off to acquire such skills and seek the proper guidance before committing their hard-earned dollars to cannabis stocks.

• Please note that on a fundamental basis, there is no way to justify the present valuations. Even under the most optimistic scenarios, according to the Quantitative Screen of The ZYX Change Method, we have difficulty coming up with valuations higher than 20%-50% of where these stocks are trading now. Please click here to learn about the Quantitative Screen of The ZYX Change Method.

• Most money is likely to be made in smaller stocks, but at the same time most money is likely to be lost in smaller stocks. Investors will need a proper balance between larger stocks and smaller stocks.

• Investors should take advantage of opportunities to diversify in this space. One example is to diversify into stocks such as Zogenix /zigman2/quotes/204255718/composite ZGNX -13.37% , GW Pharmaceuticals /zigman2/quotes/209686240/composite GWPH +0.88% , Zynerba Pharmaceuticals /zigman2/quotes/204500323/composite ZYNE -1.14% and Scotts Miracle-Gro /zigman2/quotes/200553749/composite SMG -0.55% by scaling in on significant pullbacks.

• Watch out for newsletters recommending marijuana stocks, as many of them are not independent but are paid by marijuana companies. Their interest is not the same as yours. Investors may want to stay away from newsletters with conflicts of interest either directly or indirectly through advertising.

• Do not put all or most of your eggs in marijuana stocks. Prudence calls for a well-diversified portfolio across various industries, geographical regions and asset classes. Also consider holding significant amounts of cash as the market is very high and can pull back.

Dump pumped-up stocks

There will be plenty of opportunities to make money by dumping pumped-up marijuana stocks by short-selling them. In short-selling, money is made by the price of the stock going down. As a note of caution, short-selling is suitable only for experienced investors, and stops should always be used.

This column provides a starting point for your research. Every investor must do their own further due-diligence research before investing.

Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.

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Nigam Arora is an engineer, nuclear physicist, author, and entrepreneur and the founder of two Inc. 500 fastest growing companies. He is also the developer of the ZYX Change Method to profit from change by investing. The premise is that most money is made by predicting change before the crowd. Arora is the chief investment officer at The Arora Report and the editor of four newsletters that track the ZYX Change Method. Nigam can be reached at Nigam@TheAroraReport.com

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