Hand Over Fist

“Never test the depth of a river with both your feet” – Warren Buffett

My father’s first job as an immigrant to the US back in the 1960’s was as a janitor for the company Levi Strauss. He only earned $2 per hour mopping floors, but like most first generation immigrants to America, he took whatever job he could get and through hard work and perseverance he eventually rose through the ranks there and left to join a much larger organization which allowed him to retire before the age of 60.  Stories like his are not uncommon and it truly exemplifies the real opportunity that our nation provides for those who want it (and don’t mind global taxation…).

My father did what he had to when he landed in the States and took the first job he could get.  It could have been any company. Little did my father know that just 100 years earlier, the very company that gave him his first chance of success in the Land of the Free was also the birthplace of one of the best know investing strategies in modern day: the pick-and-shovel play.

For those of you who aren’t familiar with what Levi Strauss is (or what a pick-and-shovel play is for that matter) here is a quick excerpt of company history directly from their website.

“When news of the California Gold Rush made its way east, Levi journeyed to San Francisco in 1853 to make his fortune, though he wouldn’t make it panning gold. He established a wholesale dry goods business under his own name and served as the West Coast representative of the family’s New York firm. Levi eventually renamed his company “Levi Strauss & Co.”

Around 1872, Levi received a letter from one of his customers, Jacob Davis, a Reno, Nevada tailor. In his letter, Davis disclosed the unique way he made pants for his customers, through the use of rivets at points of strain to make them last longer. Davis wanted to patent this new idea but needed a business partner to get the idea off the ground. Levi was enthusiastic about the idea. The patent was granted to Jacob Davis and Levi Strauss & Company on May 20, 1873; and blue jeans were born.”

This is the classic and most famous example of a pick-and-shovel play. The early adopters who rushed out to California first made some decent money but the true fortunes were made by those who sold the ancillary equipment needed to mine the gold. Levis Strauss didn’t mine a single ounce of gold but he sold his dry goods and denim overalls and made a fortune doing so. Today, the company is worth well over a billion dollars and perhaps more importantly, a globally recognized brand.

I still remember when I was a child, my father brought home what would now be brand new vintage Levi Strauss jeans. Somewhere along the way between the various moves we’ve had, we got rid of or lost all the pairs. We never wore them and they were in mint condition. I’m sure they’d be worth a pretty penny right now if we’d managed to keep them…

Last week we spoke about deep work and how critically important it was to incorporate it in one’s investment process to maximize chances of success. I hate it when people oversimplify investing. It drives me nuts when people try and use a simple valuation metric such as P/E or Price-To-Book and broad stroke the entire market to try and cherry pick quick winners. Maybe it’s cause stock screens have never worked for me. Or, maybe it’s because investing successfully shouldn’t be that easy (it certainly hasn’t for me).  Or maybe I’m just bitter when I see people do little to no work but still reap tons of reward (like my initial disdain with the crypto crowd).

The cryptocurrency world is a perfect place for level-headed investors to apply the same strategy that Levi did during the gold rush. Levi didn’t know anything about mining gold, nor did he know how long the trend was going to last. He knew it was a frothy market which was highly speculative but he wasn’t willing to risk his hard-earned capital and entire business jumping into something he wasn’t a practitioner in (gold mining). As an astute businessman he knew that no amount of “deep work” would get him to a level of comfort where he would start digging for gold, so he decided to do the next best (and much safer) thing — sell jeans to the miners.

I’ve met so many people that are speculating in crypto these days that have never even read Satoshi’s white paper on Bitcoin. Not only are they not practitioners (tech experts), they even are too lazy or too blinded by greed to even do a baseline level of work. There are many easy ways to quickly get up to speed on crypto and educate oneself you just have to do the work (one of my go-to resources is a company called Oddup which is an ICO/Crypto rating company used by all the major crypto hedge funds and institutional players).

A much smarter way to play this “digital gold rush” would be investing in companies that create the platforms that are used to host, store, trade or mine cryptocurrencies. Like this one:

Crypto exchange BitMEX, a perfect Pick-and-Shovel play; Source: SCMP

No one actually knows how long this whole crypto thing will last but instead of losing sleep at night constantly checking token prices which have zero fundamentals behind them, I’d much rather invest in a real business that will make money whether Bitcoin prices go up or down. (Full disclosure: To satisfy my own curiosity, I do own a tiny amount of Bitcoin which won’t make me rich nor will it affect me if the whole space goes to zero).

For any significant investment in the space, I’m using the pick-and-shovel strategy to gain crypto exposure in the portfolio. Which “play” am I investing in? After much research and networking and groveling, I’ve finally found a very good target which is ironically, a mining operation. I’ve been looking for an exchange play but haven’t found one yet…(so if any of you know of a solid one looking for funding, feel free to lob it my way 🙂)

Now when I see tweets flash through my feed from pundits that claim Bitcoin will be worth US$100,000 per coin in roughly 3-5 years time but not without seeing US$1500 first at some point along the way…I’m not fussed. I (figuratively) sleep well at night knowing that I’m making money regardless of market direction.

(BTW, don’t you love the price predictions on Bitcoin that pundits come up with from time to time?  Talk about a wide price and time spread. And they are always disclaimed with something like “these predictions should be taken with a grain of salt” and “do your own research” and “this is no way constitutes investment advice”. Imagine if there was a “sell-side analyst” job in crypto. Talk about a great gig…)