Picks and shovels

Canny investors cleaned up in the California gold rush not by prospecting for gold, but by selling picks and shovels to those who were.

During the California gold rush of the 1840s and 1850s, prospectors rushed to the area to dig for gold. A few individual prospectors managed to strike rich seams and make their fortunes, but most of them went home broke. However, the companies that made the picks and shovels and all the other equipment that every prospector needed, managed to turn a tidy profit without taking anywhere near the same amount of risk as the miners.

In a nutshell, that's the idea behind a "picks-and-shovels" investing strategy. Rather than take the "all-or-nothing" risk of trying to bet on individual pioneers all competing with one another to produce successful products for a particularly groundbreaking new industry, an investor will try to find the companies which supply the underlying technology that is required by everyone who is trying to carve out a niche in the industry. So for example, to take some of the risk out of investing in the biotech sector, you might seek out companies that offer diagnostic and laboratory-related services, rather than high-risk individual stocks whose fortunes hinge on one key experimental drug.

For something a little less high-tech, Tom Stevenson notes in The Daily Telegraph that the online retail business offers another good example. Rather than try to work out which retailer will manage to stay in fashion and on top of the logistical technology and rapidly-changing software required to compete in this fickle, fast-moving industry, you can invest, says Stevenson, in companies that provide the packaging for all those parcels being delivered around the globe.

For example, you could take a look at a rather more old-school company with a solid market position, such as FTSE 100-listed packaging products giant DS Smith, which supplies among others Amazon, Asos and Next with brown cardboard boxes to ship their goods to customers.

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