Is “Gold Rush” A Good investment Model?

When it comes to acquiring great wealth quickly, the “Gold Rush” is a popular theme.  There have been dozens of these and they have clear similarities.

  1. In the beginning they were placer findings.  Stream beds with gold in them.  These were easily accessible and exploiting them required very little capital or skill.
  2. As the streams became barren, the lodes that created the placer findings were approached.  These required greater skill and more capital.
  3. Eventually, hard rock mining became required and is vastly more difficult.
  4. In total great wealth was acquired, but it distributed itself very unevenly.  Almost all  the gold rush participants left the fields broke.

There are gold rushes today.  Perhaps not like the California rush of 1849 or the Klondike rush of the late 1890s, but rushes nonetheless.  Today however, the participants are not seeking easy precious metal finds, they are mostly seeking wealth in high tech.  Let’s design a game or app and become very wealthy.  I don’t need to invent anything as successful as Angry Birds, Facebook, Ebay, Microsoft, or Google.  I don’t need tens of billions of dollars.  One billion would be fine.

These rushes will end the same way as the gold rushes.  A minuscule number of great successes and a huge number of failures.

If you plotted the distribution it would look like the letter “U” with a small bump on the win side and huge bump on the lose side and virtually nothing between.  That is the way of life for this kind of undertaking.  Win big or lose big.

There is another observation one can draw from the chaos of the rushes.

The people who supported the gold seekers did okay.  No vast fortunes but reliable wealth.  The ancient wisdom is, when you are in a gold rush, sell hardware, tents and food.  Provide services like assay, banking and transportation. Win big enough or lose small.  It is the same with modern rushes.

There are problems with spectacular tech innovation.  Fundamental to them:

  1. You cannot see a success until after
  2. Everyone has a good idea that won’t work
  3. Ideas are near valueless.  Execution is what’s worth the money

Larry Ellison has used Oracle to make a great deal of money.  It is quiet money though.  He supplies the tools that make parts of the tech rush possible.  Same with SAP, HP, Cisco, Intel and the companies that supply fiber optic networks.  Steady innovation and predictable growth.

The rushes today include mobile device applications, drones, medical testing, storage, cloud services, online shopping, big data, and mobile finance.  Investors have choices.  They can invest in the high risk providers or they can invest in the lower risk providers of tools and services to these.

Looking for the pick and shovel vendors will provide substantial returns with much lower risk.  Boring though.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  866-285-7772

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