Warren Buffett may be considered the greatest investor of all time, but that doesn’t mean we agree with every piece of investing advice he gives.
Lately, he has been telling investors to go passive with their equity exposure through exchange-traded and index funds. That’s advice we just can’t stand behind.
Especially when it comes to marijuana investing…
The game for Berkshire has always been buying great companies at cheap prices.
Imagine what would happen if everyone did the same thing? Those prices wouldn’t nearly be as inexpensive as investors bid up shares.
To the extent Buffett can keep the masses away, he can keep buying shares on the cheap.
That’s an important lesson for anyone managing a portfolio of stocks. Even more so for those looking to start marijuana investing where the winners and losers come and go quickly.
The rapidity of evolution in the sector demands investors be nimble.
Active management is absolutely critical when it comes to investing in marijuana stocks.
And yet, Wall Street is racing to offer the passive crowd an opportunity to buy a basket of marijuana stocks using the ETF model.
LEGAL WAVE: Barriers to marijuana could be tumbling in Mexico and Thailand, but it’s here in the U.S. where legalization could spark a “Green Rush” in certain stocks. Click here to learn about three of them…
The largest of these is the passively managed Alternative Harvest ETF (NYSE: MJ) with $1 billion in assets.
While having a basket of stocks theoretically reduces risk of loss, what happens if the ETF owns the wrong marijuana stocks entirely?
There is no way to escape what very well may be a poor decision by owning a fixed portfolio of marijuana stocks.
A year from now, the sector may look entirely different.
After all, the ETF is up just 15% in the last 12 months. Those aren’t the types of explosive gains anyone investing in marijuana is looking for.
Plus, Alternative Harvest will have no way to react, and that could lead to big disappointment for those hoping to capitalize on cannabis investing.
Then there’s the new exchange-traded fund, AdvisorShares Pure Cannabis ETF (NYSE: YOLO), which comes with a list of marijuana stocks that it can hold at any one time.
On the surface, that is a brilliant solution to the main problem with a static portfolio. To the extent there are issues with a particular name in the portfolio, YOLO can jettison the loser and find a new stock to own.
Unfortunately, such flexibility comes at a price… a price that can be quite significant.
As a new ETF, YOLO is quite small. That means it can be illiquid.
That illiquidity opens the door to the potential for big losses owning a cannabis ETF like YOLO.
ETFs are traded on a public exchange with a listed price to buy shares and a listed price to sell shares.
In normal conditions, this bid/ask spread is narrow even on a small ETF like YOLO, but when markets act crazy and volatility is high, that spread can be large.
In such conditions of panic, investors in YOLO who want to close a position may be selling at a price that results in a significant loss of capital.
Typically, a large spread comes exactly at the wrong time… just when you want to sell your shares.
That’s a hidden risk to owning ETFs that needs to be factored into your portfolio management equation.
There’s a far better way…