IN EARLY 1848, news made its way to San Francisco that a construction worker named James Marshall discovered gold while helping to build a sawmill in the Sierra Nevada region of California. Initial reports prompted skepticism, but in the months that followed, the promise of overnight success fueled the largest migration in American history. People sold their homes or otherwise drained their savings in a literal rush to capitalize on the opportunity.
Among the lucky, fortunes were made and legacies established. Many, however, gained nothing. Some lost it all. Now what largely remains is an oft-used phrase, “The people who got richest during the gold rush were the ones who sold the picks and shovels.”
Like many enduring quotes from bygone eras, there are dozens of versions, most of which get attributed to Mark Twain. But who said it doesn’t really matter. What’s important is how, early in our country’s history, we experienced a gold rush, a boom, and then a bust. In the process, the dynamic of who profits the most from such booms was clearly identified, and we collectively decided the lesson was about personal interest as opposed to limiting the wide-ranging fallout of such events. As a result, we continue to repeat the boom-bust pattern, despite potentially devastating long-term effects to our economy and the well-being of our union.
In fact, over time, the quote above—which could be viewed as observational and perhaps cautionary—has been shortened to a directive: “During a gold rush, sell shovels.” This directive is specifically not something that would be helpful on a macro level, like, “During a gold rush, temper the hype to avoid a potentially devastating crash.” Rather it is an inducement to make sure you’re on the more profitable side.
And we see this advice manifested every day with countless investors and bloggers talking about “pick-and-shovel plays.” By this, they mean an investment in a trend that assures profit by maintaining a safe distance from the market-level outcome of the endeavor.
For instance, a recent pick & shovel play involves investing in the companies that make EV batteries—or, better yet, the companies that harvest materials, like cobalt, that go into EV batteries—instead of companies that make electric vehicles.
The rationale is simple: If you invest in a company like Tesla, you’re vulnerable to swings in the economy, strikes, recalls, production delays, or news reports of an unstable founder generally acting like a douche. By contrast, the investment in the materials Tesla purchases makes that nonsense irrelevant because you’ve already profited before said douchiness has a chance to mess things up.
Some view this approach as savvy while others view it as a mercenary. Some believe the tactic sets a dangerous precedent by incentivizing the detachment of one’s personal beliefs (and a concern for the greater good) from the desire for a short-term cash grab.
To return to the EV-battery example, there are many investors who personally don’t believe in—or even hate—the push toward electric vehicles but have nonetheless loaded up on battery-related stocks because they see a path to achieve a high return in a relatively short period of time.
Some of you may now get the sense this work might include a significant amount of moralizing. Let me reassure you: It won’t. Moralizing in 2024 is naive, and an almost surefire way to alienate people. There are far too many methods for folks to get a surefire hit of dopamine that no one needs a scold or a nag.
Instead, I want to deconstruct the dynamic that exacerbated one of America’s most-significant boom-bust events and highlight how that dynamic has infused itself into almost every industry during the so-called Information Age.