Interest in these stocks is growing exponentially as evidenced by the recent spike in Google searches for the term "marijuana stocks" (see graph below).

What we are witnessing here a classic example of market psychology where momentum and the greater fool theory outweighs everything else. You simply buy a stock because it has gone up the most in a short period of time, hoping to sell to someone else (the greater fool) at a higher price. There are a handful of stocks in the industry that are up anywhere from 100-900% this year (see chart below).

How will this all end? I really have no idea. One of these companies may actually go on to make a profit and grow into the high expectations set by investors. History has shown us, however, that the market is rarely kind to this type of late-cycle speculation. In hindsight, we may look back at this wild speculation as a warning sign of an impending market top.

Overall, most investors would do well to ignore the allure of these types of extreme, short-term price gains and stick to their long-term, diversified asset allocation plan. That may not be as exciting as gambling on the latest fad, but excitement and investment success seldom go hand in hand.

At the time of publication, the author had no positions in the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.



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