Investing in picks and shovels

I don’t profess to know much about digital currencies or marijuana, but I do know something about speculative investing.  If there’s one thing I know, it’s that you’ll see history repeat itself if you’re around long enough and paying attention.  As it relates to the current digital currency mania, seen in the astronomical price increase of bitcoin, we’ve been here a few times before.  I’m certain you’re not old enough to remember the 17th century tulip bubble crash in the Netherlands or the “gold rush” in the 1800’s, but the “digital currency rush” is similar.  The rapidly rising prices and a fear-of-missing-out creates a frenzy that drives investors to bet it all (or too much) in hopes of getting rich quickly. 

You may be old enough to remember the internet craze around the turn of the century.  That was a little different in that there wasn’t an underlying commodity like a bitcoin, but similar in that many investors still jumped into an emerging market without questioning the underlying value of the things they were investing in.  That created a speculative bubble of Internet businesses, which as you know burst destroying many companies and investor value.

There are important lessons that can be taken from these events, and those lessons can be applied to investing in new markets, such as digital currencies and cannabis.

  • There is money to be made from these emerging markets but you need to be patient. Even though fortunes were lost, gold and the internet did not go away.  They are still a big part of our lives, as digital currencies and cannabis will be going forward.  From an investing standpoint, you can take advantage of the value created by these markets without concerning yourself about the more volatile prices for cannabis or bitcoins. This is done by investing in the companies that provide the infrastructure (equipment, products, and services) used to produce and deliver the end products in these emerging markets.  In the gold rush, these were the businesses that supplied the “picks and shovels” used by miners to access the gold.  In investing circles this is known as the Pick-and-Shovel Play.  In the digital currency market these would be the companies that provide mining or blockchain technology to enable these transactions.  For the cannabis industry, it’s the companies supporting production and distribution, including treatments associated with medical marijuana usage.
  • Place relatively small bets on speculative investments, and never borrow money to finance those investments. Investment experts recommend that speculative investments, like bitcoin, take up no more than 5 percent of your investing portfolio, and you should never go into debt to take a new position.  The same applies when buying stock in specific companies, especially if those companies are newer (start-ups) and lack proven financial track records.  A less risker way to invest in emerging markets is by buying stock in companies that offer products and services in that market but are more financially stable and diversified, such as Accenture for blockchain technology development or Scotts Miracle-Gro for cannabis.  Buying an Exchange-Traded Fund (ETF) or mutual fund is another way to invest in the companies of a specific industry or market, but with less risk than buying individual stocks.

Following this investment approach will allow you to still take advantage of a growing emerging market, but with less volatility and risk.

If you have any other lessons or investment ideas on this topic, please leave a reply below or send me a note.

Please note that this article is for informational purposes only and does not constitute a solicitation to buy any specific investment product, service, or company.

Leave a reply