If you had the choice to invest in a gold mining company or a company supplying shovels to gold miners, which would you choose?
Not Sure?
Let me take you back to a story from the mid-1800s—the California Gold Rush.
A carpenter named James Marshall spotted tiny, glittering flakes in the riverbed of the American River in California and these flakes turned out to be gold. Word spread like wildfire, and soon the California Gold Rush was born.
Within a couple of years, tens of thousands of hopeful prospectors descended upon California, leaving their jobs and families behind to join the frenzy, dreaming of becoming rich quickly.
But reality soon set in and many prospects realised that finding gold wasn’t as easy as they’d imagined. The rivers were crowded, the best spots were claimed, and gold was often hidden deep beneath the surface. Many spent their entire savings on tools and supplies, only to leave California with empty pockets and broken dreams.
But you know who were the real winners of this Gold Rush?!
‘The Shovel Sellers’
Amidst this chaos, a different kind of fortune was being made—by those who didn’t mine for gold but supplied the miners. Entrepreneurs quickly recognized that the gold rush was less about the gold and more about the rush. They stepped in to meet the prospectors’ needs, selling shovels, pans, tents & other essential supplies.
One of the most famous “shovel sellers” was Levi Strauss. He saw that miners needed durable clothing that could withstand tough conditions. Instead of chasing gold, he created sturdy workwear out of denim. The result? The iconic Levi’s jeans, which made Strauss a fortune that outlasted the gold rush itself.
The Lesson: Consistent Returns vs. High-Stakes Gambles
Some industries, like gold mining, seem glamorous and promising on the surface, often enticing with the prospect of massive rewards. However, they also attract intense competition and carry significant risks, often diluting returns for most participants.
In contrast, “shovel companies” serve multiple players across an industry. They are less affected by the success or failure of individual players and instead benefit from the broader demand for their services. This business model provides a higher chance of success with lower risk, making it a smarter choice for investors to allocate their money. In fact, companies often referred to as sector proxies are essentially the same as these ‘shovel companies,’ serving as the backbone of their respective industries.
“The more things change, the more they stay the same”.
I say this because there is always some or the other ‘Gold Rush’ going on and as investors we should be cognizant of where we are investing our money.
Nvidia: The ‘Shovel Company’ that Climbed to the Top 2 Global Giants.
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Modern-Day Examples: The Indian Context
The E-Commerce ecosystem: In India’s e-commerce boom, companies like Flipkart and Amazon India dominate the spotlight. But behind the scenes, logistics companies such as Delhivery, Blue Dart, Shadowfax are big winners. These shovel providers ensure that goods reach customers efficiently while maintaining stronger business economics compared to the fiercely competitive e-commerce platforms.
The EV Infrastructure: The electric vehicle (EV) industry often focuses on automakers like Tata Motors, M&M, Ola, Ather, etc. However, these OEMs (Original Equipment Manufacturers) face significant capital expenditure, R&D costs, and intense competition. In contrast, auto ancillary companies, like battery manufacturers, stand to benefit from the growth of the EV industry as a whole, regardless of which automaker takes the lead.
Fintech Data Providers: With the rise of digital finance, infrastructure providers in fintech are thriving. Companies like BSE and NSE play critical roles as stock exchanges, CAMS and Kfintech are central service providers for financial transactions, while CDSL and NSDL serve as depositories for stocks and securities. As retail investing in India grows, these players experience steady demand, making them essential and profitable behind-the-scenes contributors.
These examples emphasize a clear investment strategy: prioritize businesses with a high likelihood of success and lower risk, similar to “shovel companies,” rather than taking chances on high-stakes, high-risk industries with low odds of success, like the miners.
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Till the next time,
Vijay
CEO – InCred Money
P.S. I share my thoughts on Investing and the Economy regularly. You can follow me here.
