Cannabis Investors: Have You Taken Any Profits Lately?

At these levels, most cannabis investors probably feel like geniuses. But as we inch closer towards legalization day, it’s important for investors to check their egos at the door. After such an exponential run, it’s important that cannabis investors trim at least some profit, since it’s likely that their cannabis positions have grown to comprise a substantially larger portion of the overall portfolio.

Now is not a time to be complacent, so if you’ve doubled, tripled, or even quadrupled up, you should strongly think about taking at least a bit of profit off the table. As Jim Cramer of Mad Money always says: “Bulls make money, bears make money, but pigs get slaughtered.”

Taking profits is a lot easier said than done, since you’re likely to experience a fear of missing out (FOMO) after you hit the sell button. You may be inclined to invest more in the cannabis industry as it continues to take off, but contrary to what your instinct is telling you, placing a bigger bet is a great way to become a victim of your own greed.

It’s human psychology; it doesn’t matter if you’re a genius. Sir Isaac Newton was arguably the smartest man that’s ever lived, and he fell victim to the South Sea Bubble, which I’m sure nobody would have agreed was a bubble at the time when he decided to up his bet on something that was a huge win.

A lot of folks who have made a great deal from cannabis stocks feel devoted to their positions and would deny that cannabis has moved into bubble territory, but unfortunately, it’s these folks who will surrender most of their gains once the next sell-off occurs, since they’re less likely to trim profits and are more likely to add to their positions in time.

There are still a lot of unforeseen events that could trigger a catastrophic industry-wide meltdown, and given the rise of speculative activity by the average investor of late, I think they should start to become fearful; it appears that the average investor only seems to care about short-term news events (like acquisitions) that are dictating the short-term price of pot stocks.

Many fellow Fool contributors have begun to refer to the cannabis industry as a bubble that’s comparable to that of the cryptocurrency market. I think that’s exactly what’s happening, even though the emerging cannabis market is a real opportunity, unlike crypto, which I believe is pixie dust.

Aurora Cannabis Inc.’s (TSX:ACB) recent acquisition of CanniMed Therapeutics Inc. (TSX:CMED) for $1.1 billion could be one of the most poorly timed moves in the cannabis market ever. Not only are shareholders getting severely diluted, but I believe there’s a high probability that Aurora could have made the deal happen at the fraction of the price if it had just remained patient and waited for the next correction to come in.

Bottom line

The recent M&A activity conducted at these levels will likely destroy longer-term shareholder value. Such large acquisitions north of $1 billion make me cringe, so if you’re not adding to your cannabis positions, I’d recommend trimming your overall exposure. And if you’re exposed to Aurora or any other pot firms itching to pull the trigger on another deal, I’d recommend trimming those positions first. So, if you own all the Big Four pot producers, Aurora and Aphria Inc. (TSX:APH) should be at the top of your cut list.

And remember: just because you’re selling now doesn’t mean you won’t be returning at some point in the future — potentially after an industry-wide correction. Be patient; don’t be complacent. And always consider the bigger picture.

If you’ve made a great deal on pot stocks, yet you refuse to trim, don’t say you weren’t warned when the online brokerages shut down, as all investors head for the exits at the same time. By then, you may not have the opportunity to sell.

Stay hungry. Stay Foolish.

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Fool contributor Joey Frenette has no position in any of the stocks mentioned.