Anthony Wile is chief editor of the economic and investment newsletter The Daily Bell and chief investment strategist of High Alert Investment Management.
The election of Justin Trudeau's Liberals has had an immediate impact on the investment marketplace, with a rush to invest in the handful of publicly traded Canadian medical marijuana startups – all on the promise of legalization of recreational marijuana use.
However, as with any burgeoning new industry, including the Canadian cannabis industry as it "whitens" from its previous black-market status, investors considering directing their capital there may want to take a temporary respite from hitting the go button.
Investors who make assumptions today about what may be profitable tomorrow will likely find their wallets considerably lightened by a changing set of regulatory circumstances.
While a legalized cannabis industry means a substantial increase in potential profitability for the industry leaders already invested in the marketplace, for all investors the key questions are: What will that new landscape look like? How will the industry be regulated, structured and taxed? And, most importantly for the new or individual investor – how best to navigate the marketplace?
There are estimates that the Canadian cannabis industry could be worth as much as $10-billion a year, and based on the Colorado experience, that may even be a low estimate.
However, one thing is for sure: When you have a business opportunity with as much potential as the Canadian cannabis industry, there will be significant changes from both a regulatory and fiscal standpoint before the final product is rolled through the door and into the marketplace.
NDP Leader Tom Mulcair, who made supportive comments about cannabis legalization late in the campaign, may have the right idea.
Mr. Mulcair pointed out that although he now supports Mr. Trudeau's position of full legalization, it will take time to properly structure and regulate this new industry.
The alcohol industry is often looked to as a model for cannabis. It is actually an intricate and competitive environment where regulation collides with the market and various layers of taxation as well. The emergent cannabis market will be no less intricate and the operating rules will include input from every kind of stakeholder.
What the industry looks like today will certainly not be what it looks like tomorrow. And the debate over who should be in charge of which aspects of the business is going to be a long and convoluted one.
As the business matures, corporate and institutional pressure will certainly build, and this will prove to be an additional complicating factor. Does anyone really believe that a $10-billion annual industry will be left in the hands of mom-and-pop operators and that larger corporate interests won't try to dominate the sector?
Both government demands and corporate pressures will ensure that the "all under one roof" producer-retailer model will be a thing of the past. And that means the current market projections based on future revenue potential for current producers will likely suffer severe adjustments.
Consider the model of Washington state, where producers share in only approximately 22 per cent of the overall revenue stream. Naturally, as one would assume, retailers claim the lion's share.
Is this what's in store for the Canadian cannabis industry?
Remember, too, that Canada is not the only player in this sector, and that federal decisions cannot be taken in a vacuum.
There are far larger forces at work. These forces will centre on the forthcoming United Nations General Assembly special session on drugs in April, 2016. Here, the 193 UN member states, including Canada, will seek to ratify a new approach to the global war on drugs that is expected to feature decriminalization and treatment rather than incarceration.
Former UN secretary-general Kofi Anan, numerous past presidents of various countries, and business leaders such as Richard Branson and Wall Street maven Paul Volcker have been leading a global commission for drug legalization and regulation.
Results from that conference will provide yet another overlay of regulation and competitive intricacy that will have a significant impact on the shape of the Canadian cannabis industry, no matter the federal legislation.
For all these reasons, investors might be well advised to let some time go by before taking significant positions in Canada's newly minted cannabis marketplace.
Waking up one morning to find that the government and major corporate participants have dramatically changed the playing field – and altered the profitability of one or more of your investments – is not a headache anyone needs.
Slow down. Take a deep breath. You don't need to be in such a hurry – because if you are, you may get it wrong.
It will take a while for this industry to mature to the point where it will be predictable and increasingly transparent. Rome wasn't built in a day, and your portfolio of cannabis investments won't be either.