By Dr. James M. Dahle, WCI Founder
While this may not be a question that most experienced white coat investors have in mind, it is one that pops up frequently among investors, including physician investors. Cannabidiol (CBD) oil (a component of marijuana and hemp) has been all over the news and medical literature in the last few years. Stores selling products containing CBD have popped up all over the place. There are dozens of CBD/marijuana stocks and a dozen or more ETFs that invest in those stocks. Yahoo and Motley Fool are publishing articles telling you which ones to buy and which ones to avoid. You may be wondering how best to “play” this phenomenon. Well, I've got an opinion about it, and I'm not afraid to share it.
What Is CBD?
First, let's get some facts straight. Cannabidiol is the second most prevalent active ingredient in marijuana, right behind delta-9-tetrahydrocannabinol (THC). While it is in marijuana (and considered to be essential to “medical marijuana”), what you see sold all over the place generally comes from the closely related hemp plant. It's kind of like hemp rope and T-shirts. The benefit of CBD over THC is that nobody seems to get high from it and nobody seems to get addicted to it. Starting in 2015, it became legal to study CBD, and in 2018, hemp and all of its derived products became legal. CBD is now attainable in all 50 states, subject to varying amounts of regulation. In most states, you do not need a medical marijuana card to get CBD. You can order it online or pick it up in a store on your way home from work.
What Does CBD Do?
The best evidence that CBD actually does something has come from studies on childhood epilepsy syndromes. Epidiolex is also approved to treat tuberous sclerosis in the US. There is a CBD drug (Sativex) approved outside of the US for muscle spasticity in multiple sclerosis and cancer pain.
Like any good snake oil (and it seems most psychiatric meds), it has been tried for just about every other difficult-to-treat condition with various people and studies claiming benefit. It is possible that it might work for anxiety, insomnia, chronic pain, arthritis, and addiction. Since just about everybody has one of these conditions, that produces a huge market for CBD products. Side effects include nausea, irritability, and fatigue but apparently not an insatiable craving for Pringles. Like grapefruit, it can make blood thinners more potent by affecting liver enzyme function.
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What Are the Products?
Besides the medications (which are pills), CBD can be taken as an oil, abstract, capsule, patch, bath bomb, vape, spray, lotion, or cream. The main problem with CBD is that it is sold as a supplement. As you have probably noticed, products sold as supplements at GNC or via your favorite essential oils salesperson have a very different regulatory environment than medications do. While the Food and Drug Administration regulates both medications and supplements, the rules are very different. Essentially, supplements are food, not drugs. So, the food rules get applied to them. Supplements are intended to “add to or supplement the diet.” The FDA says that “to the extent a product is intended to treat, diagnose, cure, or prevent diseases, it is a drug, even if it is labeled as a dietary supplement.” But in practice, it's far easier to make and sell something when it gets labeled as a supplement instead of a drug.
Thanks to people like the late Utah Sen. Orrin Hatch (Utah has a thriving supplements industry), the FDA does not have the authority to approve dietary supplements for SAFETY and EFFECTIVENESS or to APPROVE THEIR LABELING BEFORE the supplements are sold to the public. It's up to the companies. They just have to have a nutrition label on the back, like Froot Loops and cheese. It also has to have the word “supplement” on it. Basically, the FDA doesn't even start regulating supplements until AFTER they've hit the market. If it gets a lot of complaints or reports of badness, the FDA tries to get the manufacturer to fix the product or stop selling it. Only in fairly extreme circumstances does the FDA force the manufacturer to stop selling it. Contrast that with the years-long, billion-dollar process to get a new drug to market.
Since CBD is already on the market, there is little incentive for manufacturers to now do any studies proving it works and is safe. Some academics are looking into it, but there isn't a lot of money behind the efforts. Studies are needed, but they're not being done very quickly and probably won't be. Meanwhile, just like with many other supplements, there are people out there making wild, completely indefensible claims and sharing anecdotes about it being able to cure cancer and COVID-19 and just about anything else.
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4 Reasons You Should Not Invest in CBD
The truth is that most white coat investors are already “investing in CBD.” If you own a total stock market fund, you own all of the publicly traded companies in the US, including those that make and sell CBD. However, the question is whether you should “tilt” or “overinvest” in these companies. For example, you might consider a small portfolio allocation to the largest marijuana-associated ETF, AdvisorShares Pure US Cannabis ETF (MSOS).
#1 Uncompensated Risk
I have written before about the concept of uncompensated risk. This is what you should think of when you consider investing in individual stocks or narrow sectors of the stock market, like CBD stocks. Basically, if a risk can be diversified away, you should not expect to be paid for taking that risk. When asking the question of whether you should invest in:
- Cigarette, or
stocks, the answer is almost always going to be no. What you are really asking is, “Will this go up faster than everything else?” Since the answer to that is “nobody knows,” you should not invest in it. You're really just gambling. And if you want to gamble, go to Vegas and put it all on red. At least then you have a 48% chance of doubling your money, which is better than you are likely to do investing in most fads (at least by the time you hear about them).
#2 Ethical Concerns
While I don't spend a lot of time lying awake at night worrying that the companies that I invest in might be doing something bad to their employees, the environment, or society in general, lots of people do. Those sorts of people may be concerned about supporting something being touted to do all sorts of things that it almost surely cannot do. In addition, most CBD-associated investment vehicles are also heavily associated with marijuana. While marijuana probably has some beneficial medical uses, it also has lots of downsides to individuals and society in general, not the least significant of which is the delusional belief that smoking three bowls a day cannot possibly contribute to cyclic vomiting syndrome. It's hard to support CBD and not support pot.
#3 Don't Invest in Fads
Ever since the Dutch Tulip Mania, investors have been jumping into fads, buying investments after they become popular. This is classic buy-high, sell-low speculative behavior. In fact, by the time ETFs that allowed you to invest in CBD (and marijuana) stocks appeared, it was probably too late to catch much upside. For example, as I write this in late 2022, MSOS is down almost 60% in the last year, while the overall US market is down 16%. If you thought it was a great investment at $30 a share, you're going to love it at $12. If you're reading about an investment in the popular press, it's far too late to catch that speculative wave. Plus, you still have to know when to get off that wave! Is it now oversold and time to buy? Again, I have no idea. My crystal ball is cloudy. That's why I designed an investing plan that did not require me to predict the future to reach my financial goals. I suggest you do the same.
For political reasons (and because lots of people like getting high on weed), CBD and marijuana got way ahead of the medical literature, and within just a few years, it has essentially been legalized across the country. That resulted in a bit of a gold rush phenomenon among those who make money in this space. It ended like every other speculative fervor and gold rush. Maybe there will be another rush. Maybe there won't. I don't know and neither does anyone else, including you.
#4 Minimize Expenses
One of the core tenets of investing is to minimize your expenses, including taxes. However, the investment vehicles that you might use to invest in CBD are anything but cheap. MSOS, for instance, has an expense ratio of 0.80%, at least 20X as high as a good total stock market fund. In addition, its turnover in the last year was 48% (compared to 4% for TSM). That can generate a ton of additional tax expenses. Bid-ask spreads on thinly traded ETFs can also be significant. These sorts of ETFs are products designed to be sold, not bought. Know the difference.
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Back to the original question. No, you should not “invest in CBD.” Instead, put together a sensible investing plan and follow it.
What do you think? Do you invest in CBD or marijuana? Why or why not? Are there ethical considerations for you, or is that something you wouldn't worry about? Comment below!