Cannabis, bitcoin and minibonds are three investments gaining more traction with investors and becoming borderline mainstream but Informed Choice managing director Martin Bamford said they should steer clear of all of them. 
The financial adviser said they are among some of the worst investments that the average person on the street could make.
The most topical is marijuana – also referred to below as weed, cannabis or pot – after Canada last week became the first industrialised country to legalise the use of recreational cannabis opening itself up to a potentially huge market.
It follows several US states who have made the drug legal, although it is still illegal at a federal level. Germany also legalised medical marijuana last year.
Recent projections show that the legal marijuana market could reach $22bn by 2022, with the German market (for example) potentially reaching $1.6bn in 2022 – up from just $9m last year.
Bamford (pictured) noted that this “huge amount of growth” has meant there are “clearly a lot of investors getting very excited about the potential size of the pot market”.
Indeed, it is estimated that the sector saw some $6.6bn of investment in the first 10 months of 2018 as the hype around investing in cannabis continues to grow.
But investing in cannabis is not just about buying growers or retailers. There are connected investments too such as pharmaceuticals and biotech companies that are making cannabinoid-based drugs. There are also companies that offer services such as distribution, storage and security for the cannabis retailers.
There is even a global cannabis stock index, which has tracked the performance of publicly-traded legal marijuana since 2013, Bamford noted. The index is currently trading at 133.46 points – down from a year high of 194.95 points – having opened at 100 points.
However, despite the growth potential, the Informed Choice managing director said investing in the drug is a bad idea from an investment perspective for a number of reasons.
“This is a fledgling sector. Lots of the companies have little or no real trading experience. They don’t have a track record on which you can base their chances of success,” he said.
“Most cannabis company stocks are not generating positive cashflow. As an investor I think you should be extremely cautious when analysing any investment in a negative cashflow company.”
Another really big factor is politic and legislation – particularly in the largest global market for weed: the US.
“In the US, which represents the majority of the growth potential from legalised cannabis sales, there is every chance the federal government will step in and shut things down,” he said, noting that US attorney general Jeff Sessions is a long-time opponent of marijuana legislation.
Another issue is the illegal market, or black market, which has so far stymied the growth that had been expected from legalised marijuana sales.
“It is apparently a lot cheaper to buy weed from a backstreet dealer than from a shop which has bills to pay such as rent, electricity, et cetera and has large taxes as well,” Bamford said.
The final reason not to buy into the cannabis market is the sheer cost of doing so. While most companies are valued on a price-to-earnings ratio, as many of these companies are not profitable they are valued at a price-to-sales multiple.
He highlighted: “The top three Canadian marijuana stocks have got a price-to-sales ratio of 159x or higher. That is seriously expensive for an investor when you consider a price-to-sales ratio of 8x is typical in other sectors.”
As such, Bamford said: “I think we can watch the legalised cannabis industry with interest – especially as other countries decide whether or not to legalise cannabis – but probably give it a miss as an investment.”
Up next is bitcoin, which has fallen back from its peak of $17,549 in December last year to its current value of $6,441, as the below chart shows.
Performance of bitcoin since launch
Source: Coindesk
“It is simply not an investment in the same way that tulip bulbs and fine wines are not an investment,” Bamford said.
“If you buy bitcoin you are speculating that someone somewhere will be prepared to pay you more than you paid for the privilege of owning this intangible bit of data.”
While the underlying technology – blockchain – has some potential new uses and interesting applications, bitcoin itself is worthless, he noted.
“Steer clear. Don’t believe the hype. There are all sorts of reasons why bitcoin is a bad idea but really that whole industry that has been built up around cryptocurrency trading is such a ‘wild west’ – it is unregulated, dangerous and attracting some very shady characters.,” Bamford warned.
“I am quite pleased to see the hype has started to ease off this year compared to last year but steer clear of it. It is not a good investment.”
The final fad to avoid is minibonds – again in the news recently as the return of the ‘burrito bond’ from Mexican restaurant chain Chilango (which raised £2.1m from its first bond in 2014), as well as others were launched this month.
With a typical lending period of three-to-five years, minibonds are a bit like an IOU which is then sold to investors and allows a range of businesses to raise money.
They all differ in terms of their promised returns and terms but generally as an investor who buys a minibond you are promised regular interest payments throughout the term and your initial investment back at the end of the term.
These regular payments are usually made monthly or quarterly and are often made up of a combination of cash and perks.
“Minibonds have become a popular way for businesses to raise cash since the global financial crisis and that is because the economy environment has become such where the banks are less willing to lend to growing businesses – especially riskier businesses,” Bamford said.
“For investors they tend to offer a higher rate of interest than cash deposits but of course the risk to your capital is much greater.”
And despite interest rates typically above 7 or 8 per cent and some sweet benefits such as free wine or food (depending on who you are lending to), the Informed Choice manging director said these are not a good investment.
“They are not subject to the same regulatory scrutiny as mainstream investments, so the businesses involved can make claims that may not be substantiated,” he said.
“As an investor you don’t benefit from any protection from the financial services compensation scheme so if the business fails you are unlikely to get any money back.
“[Additionally] These minibonds cannot be traded on the secondary market so once you are in, you are in for the rest of the term.”