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.

Recommended

Key dates for 2023: here are the dates you need to know when it comes to your money in 2023
Personal finance

Key dates for 2023: here are the dates you need to know when it comes to your money in 2023

There is no shortage of important dates to be aware of next year – which are likely to affect your financial health. We run through the key dates in 2…
6 Dec 2022
Investment scams are infiltrating Facebook and Instagram
Investment strategy

Investment scams are infiltrating Facebook and Instagram

Research from Which? found hundreds of investment ads on Facebook and Instagram that could be misleading investors into potential investment scams.
6 Dec 2022
The MoneyWeek Wealth Summit: silver linings for investors amid the global gloom
Investment strategy

The MoneyWeek Wealth Summit: silver linings for investors amid the global gloom

MoneyWeek’s annual conference featured plenty of optimism and investment ideas.
29 Nov 2022
The MoneyWeek Wealth Summit this Friday - everything you need to know.
Investment strategy

The MoneyWeek Wealth Summit this Friday - everything you need to know.

Andrew Van Sickle runs through the speakers and topics under discussion at the upcoming MoneyWeek Wealth Summit. Everything you need to know about inv…
24 Nov 2022

Most Popular

Is it cheaper to leave the heating on low all day?
Personal finance

Is it cheaper to leave the heating on low all day?

The weather is getting colder and energy bills are rising, but is it really cheaper to leave the heating on low all day or should you only turn it on …
1 Dec 2022
Radiator vs electric heater – which is cheaper?
Personal finance

Radiator vs electric heater – which is cheaper?

We compare the costs, pros and cons of radiators and electric heaters and see which one will help keep your energy bill as low as possible.
28 Nov 2022
The pros and cons of smart meters – should you switch?
Personal finance

The pros and cons of smart meters – should you switch?

A smart meter can help you keep tabs on your energy usage, but is it better than a regular meter? We take a look at smart meters vs regular meters.
2 Dec 2022