In December 2019, Canadians bought C$146 million of legal cannabis. It was the largest monthly sales total on record.

Annualized, that worked out to C$1.75 billion in legal cannabis sales, in Canada alone, for 2020.

And sales spiked in mid-March as users stocked up ahead of the pandemic lockdown.

You would think, seeing those sales numbers, that the cannabis industry is a great place to invest right now. And you’d be right.

In the latest Marijuana Market Update, I told folks it was “game on” for cannabis investing.

That’s true — for the best pot stocks.

Now more than ever, if you’re considering jumping into this sector, you need to do some research first.

The Most Shocking Pot Bankruptcy

The biggest challenge is funding.

Cannabis companies, like all early-stage companies, issue shares to raise capital.

However, that market began to dry up in 2019. The amount of capital raised last year was 31% lower than in 2018. And today, investors aren’t as interested in small companies. The pandemic put cash at a premium.

That means the companies that are low on dough will be in trouble going forward.

In the past 15 months, the following companies have gone bankrupt:

The most surprising bankruptcy was CannTrust Holdings (Toronto: TRST). CannTrust was a market darling for most of its public life.

Investors flocked to its diversified portfolio and its aggressive approach to the cannabis market. The company boasted a $1.3 billion market value in 2018.

Both the New York Stock Exchange and the Toronto Stock Exchange halted its shares on March 30, 2020.

That means the stock is gone. Investors who held shares of this one to the bitter end lost everything. All that cash went to money heaven.

You can see in the chart below what a wild ride it was:

Once the poster child for the huge possibilities in marijuana investing, its wheels came off in July 2019.

That’s when regulators found CannTrust growing marijuana in unlicensed rooms. It turns out CannTrust’s leadership lied to the authorities.

The scandal started a slide that sparked a sell-off of the entire cannabis sector.

Health Canada’s decision to withhold CannTrust’s grow licenses spelled the end for the company.

That’s why we must be wary of these companies.

Ride the winners, and cut the losers early. That’s the best way to lower your risk and be successful in this sector.

Make no mistake: Smart cannabis investors stand to make a lot of money if you buy the right stocks today.

The easy way to do that is through an exchange-traded fund (ETF) like the Cannabis ETF (NYSE: THCX) or the Horizons Marijuana Life Sciences ETF (TSX: HMMJ).

However, these funds give you exposure to baskets of companies in the sector: the good and the bad.

If you’d like more specific, individual cannabis stock recommendations, we just updated our Marijuana Millionaires special report in Real Wealth Strategist, my premium research service.

Four stocks are screaming buys today. Click here for the details.

Good investing,

Matt Badiali

Matt Badiali

Editor, Real Wealth Strategist