During the great California Gold Rush, 1848-1855, the gold prospectors were not the people who made the most money. Most of them returned home penniless. It was much more common for people to become wealthy by providing the miners with over-priced food, supplies and services. Sam Brannan was the great beneficiary of this new found wealth. Prices increased rapidly and during this period his store had a turnover of $150,000 a month (almost $4 million in today’s money). Josiah Belden was another man who made his fortune from the gold rush. He owned a store in San Jose, California. Trade increased dramatically during the years that followed the discovery of gold. It is claimed that he made so much money that he never needed to work again. So in other words it was the suppliers of picks and shovels who made the most money during the gold rush.
Hence the reason why so-called picks and shovels companies remain excellent investments today. Why is this? There are many reasons why. Here are some of them.
When investing in a high growth sector it is difficult to predict who will be the winners and losers. By investing in the suppliers instead you do not need to find the winners. You simply need to find the best suppliers which involve less guesswork. Usually, there are only a few top suppliers (picks and shovels) but countless customers (gold prospectors).
You need to work out what is the modern day equivalent to the gold rush and ascertain who are the current picks and shovels companies. By the way, when I say gold rush I do not mean speculation. Let’s take semiconductors as an example. Many digital consumer products in everyday life such as computers, mobile phones/smartphones, digital cameras, televisions, washing machines, refrigerators and LED bulbs also use semiconductors. The market is huge – estimated to be $550bn in 2021 and growing to over $800bn by 2030. Taiwan Semiconductor Company, one of our CCM Intelligent Wealth Fund’s holdings, has a global share of 63% of the semiconductor market.
Avoid speculative sectors such as arguably anything cryptocurrency related because when that speculative sector implodes the size of the sector shrinks dramatically overnight bringing down both the suppliers and the customers. Instead concentrate on sustainable, stable, high growth sectors such as semiconductors where market growth is highly probable and not at all speculative.
Avoid “sexy”, popular companies such as Tesla in flavour of the month sectors such as electric cars which are often vastly overvalued and ripe for a fall. The best picks and shovels companies are often unsexy in sectors which are a bit boring yet their growth prospects are not boring at all. On the contrary growth in unpopular sectors is actually quite exciting when you are the investor
So when investing, seek out the picks and shovels companies. You know it makes sense.*
*The value of investments and the income derived from them may fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action. All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs practice. Levels and bases of tax relief are subject to change.
This blog is based on my own observations and opinions.
