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Why you could smoke your money buying pot stocks today

There is something very alluring about the idea of being able to make a quick return in a matter of days or weeks.

Pot stocks such as MMJ Phytotech Ltd (ASX: MMJ), Creso Pharma Ltd (ASX: CPH) and Auscann Group Holdings Ltd (ASX: AC8) have all seen huge gains in recent months. If you were an investor before they skyrocketed, then you’d be pleased with yourself.

However, I don’t think they are a sensible place to put your hard-earned capital. They have little to no earnings to speak of and Australia is a long way away from commercial production levels of cannabis.

Therefore, in my opinion I think it would be best to avoid pot stocks altogether. Just think back to the dot com boom in the late 1990s where businesses with tiny earnings were trading on high multiples and then came crashing down. The same could easily happen here.

Just because a price goes up doesn’t make the underlying business worth any more. Think back to Liquified Natural Gas Ltd (ASX: LNG) (LNG) shares when it was trading at $0.30 per share in January 2014, rose up to $4.90 by May 2015 and it has since come back down to $0.68 at today’s price. There wasn’t anything wrong with LNG, but the valuation simply became a game of speculation and grew far too high.

You only have to look at stocks like Bellamy’s Australia Ltd (ASX: BAL) and Shine Corporation Ltd (ASX: SHJ) to see how quickly a share price can decline when sentiment goes against it.

In my opinion, the pot stock prices have gotten too high and I wouldn’t want to jump on the bandwagon at the current prices.

Instead, I'd much rather put my faith in stocks like these that are generating real, strong growth and paying shareholders with actual dividends.

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Motley Fool contributor Tristan Harrison has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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