Listen To The Shark: Why The Weed Industry Isn't A Good Investment, According To Mark Cuban
As the whole of the weed-loving world rounded out the holiday season by celebrating the first legalized sales of marijuana in the US, there was one pubic figure who stuck his nose up at the joy surrounding the landmark event: celebrity billionaire Mark Cuban.
It wasn't the actual legalization of marijuana that Cuban was opposed to -- that piece of legislation that one would think few could begrudge. Rather, Cuban downplayed the notion that the cannabis industry is a good investment when he was questioned on Twitter about its profitability.
True to his nature, the Mavericks owner considered the marijuana industry from an ROI (return on investment) perspective. Marijuana, he says, wouldn't be worth pumping money into because it's only a matter of time before sale prices plummet, which, in turn, would eventually lead to high taxation of the now-sanctioned product.
With all the euphoria surrounding the grand opening of legal weed shops in Colorado -- one CBS reporter interviewed customers that came from as far as Ohio and Michigan -- and the endless, no-brainer positives associated with pot's legalization (money no longer needed to police the drug, a new source of revenue for states, etc.), one might find it difficult to conjure a negative view on the newly-legitimatized industry, especially from a financial perspective. Cuban's assertion, however, does have credibility, as the billionaire typically maintains.
It's a two-sided opinion, however, which calls for further elaboration:
First, let's consider the money side of things. The money earned by weed retailers in Colorado since distribution became legal on January 1 has been well documented. "Well over $5 million [worth of marijuana was purchased] in the first five days," said one article from Los Angeles-based Telegraph reporter Nick Allen. With long lines and high revenue hinting at incredible potential for profit, those same reports have been accompanied by others, describing the price inflation of weed after a matter of days.
At some stores, customers were paying about $400 for an ounce of pot, double the amount that some were paying for medical marijuana just a week prior in the Rocky Mountain state. Yet, in the first days of legal weed sales following New Year's Day, otherwise known as "Green Wednesday" in Denver, customers were likely not to pay mind to the cost.
"This is quality stuff in a real store. Not the Mexican brick weed we're used to back in Ohio," customer Brandon Harris told CBS. Indeed, many seemed to keep focus on the fact that they were actually purchasing quality weed, legally, regardless of the price.
As time goes on, many new retailers will surface. Reports say that over 100 shops have been given license to sell but had their openings delayed by red tape -- a mere dotting of the i's and crossing of the t's, if you will. When more retailers do open up, however, prices are bound to fall back to earth.
“That’s just supply and demand,” Aaron Smith, executive director of the National Cannabis Industry Association, told Bloomberg's Alison Vekshin. “As more businesses open and the businesses get a sense of what the demand is and are able to meet it, the prices will go back down.”
When it comes to Cuban's viewpoint, price is one thing, but it's what he says about taxing the product that is most damning for the legal weed industry. In Denver, for example, sales of weed are taxed at rates between 30 percent and 35 percent, while Washington state has already slapped a tax rate of about 50 percent on pot sales.
From here, how true to reality Cuban's assertion comes will depend on whether taxes increase. If taxes truly do rise as "heavily" as the Dallas Mavericks' owner expects, from this already substantial point, then there's reason to believe that customers will revert to purchasing weed from the illegal dealers they presumably trusted before.
“People will get real tired of paying the taxes real fast,” one black market dealer is quoted as saying by Forbes. “When you can buy an ounce from me for $225 to $300, the state adds as much as $90 just for the tax.”
Even government officials acknowledged the possibility of stoners sticking to what's familiar and "easy." Local politicians in Colorado said if high prices lead to a continuing cannabis black market, then taxes could at some point be reduced, according to Allen.
Combine these circumstances -- prices and taxes -- with fact that marijuana can legally be sold in designated weed-only shops in Colorado and those that will spring up in late May to June in the state of Washington (as opposed to other stores, which sell weed in the same way that coffee shops in Amsterdam do), and you'll find that there is even less opportunity to profit off the industry than one may initially believe. Thus, Cuban's opinion becomes all the more valid, at least for now.
Because the industry is so young and lacks standardization, as well as organization, it naturally does not appear to be a safe bet, which the best of investments are supposed to be.
“This is the birth of a new industry,” Randy Simmons, deputy director of Washington state's Liquor Control Board told Bloomberg. “People want this thing to be born as a fully grown adult. But it’s still a baby, and we have to nurture it and protect it and help it grow.”
As such nurturing takes place, changes will also transpire. Take into account the already foreseen supply changes, for instance. As Forbes' Jacob Sullum explains, the product currently being sold in Colorado is simply medical marijuana, which is now advertised as recreational marijuana, as new laws have come into effect. Recreational marijuana hasn't actually been harvested yet.
Once harvesting of recreational weed begins in the spring, supply shortages -- another issue currently facing the industry -- will cease. This current issue is brought on by the cap placed on the harvesting of medical marijuana, which ensures that the production rate does not meet widespread demand.
No matter how the road pans out for this industry, however, in the coming months and years, there is one thing the legal marijuana industry will have on its side: peace of mind.
Speaking to Bloomberg's Joni Balter, Reuven Carlyle (D), chairman of the Finance Committee in Washington state's House of Representatives said, “There is enormous value in being able to walk safely into a store and know you are purchasing a high-quality, safe product that previously carried big risk.”
It's hard to argue with that. For now, though, Cuban's claims are spot on.
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