What does a pair of jeans and the US Post Office have in common? Little on the face of it, but from an investment perspective quite a lot. They are both second-order beneficiaries of someone else’s investment boom. The jeans manufacturer grew out of a dry goods business set up in San Francisco to supply the thousands of hopeful miners who flocked to California in the 1840s gold rush. The post office, as President Trump has inadvertently explained via his rants on Twitter, is one of the big winners from the Amazon-fuelled expansion of e-commerce.
Buying online requires some pretty sophisticated technology and logistical wizardry but getting your purchase from warehouse to doorstep is an old-fashioned process that looks very similar to any parcel delivery over the past century and more. It’s about cardboard boxes and a man in a van. One day he might be replaced by a personalised drone, but for the foreseeable future Amazon is dependent on Postman Pat.
As one is a privately-owned company and the other an arm of the US government, neither Levi’s nor the US Postal Service is directly investible. They are, however, excellent examples of the lateral thinking that all investors should employ when looking for money-making opportunities. As Mark Twain may have once said: “in a gold rush, you want to sell picks and shovels.”
The thinking behind this well-worn adage makes statistical sense. Panning for gold was always a high-risk venture. You had to buy land at an inflated price in the usually vain hope that you would strike it rich. Most didn’t but many were tempted. Selling the tools and hard-wearing clothes that the prospectors all needed was a much safer bet.
Technological disruption is changing the world at an unprecedented pace and investors have unsurprisingly woken up to the fact. Donald Trump’s assault on Jeff Bezos’s e-commerce giant may have wiped $60bn from Amazon’s market value in the past couple of weeks but you’d be hard pushed to notice this on a long-term share price chart.
Amazon’s shares have traced the traditional exponential path of all investment bubbles, turning left and heading up the screen in the past few years as investors have decided that Bezos’s behemoth is now unstoppable. That’s great if you have ridden the wave, as one of my favourite funds - Rathbone Global Opportunities, managed by James Thomson - has in recent years.
For the rest of us, sky-high valuations, regulatory threats and an unpredictable President make the obvious winners of the technological revolution look dangerously exposed. Investors today might be better off doing the lateral thinking that will highlight the new picks and shovels makers that will benefit from the disruption theme but at a less eye-watering price.
This is doubly important in the case of Amazon because the company has fallen foul of the Trump administration’s determination to neuter the Washington Post. The newspaper is in the vanguard of the minority of US media holding the President to account and it just happens to be owned by Mr Bezos. He is the only link between the Post and Amazon but it is the e-commerce giant’s shareholders who might pay the price for the association in the President’s mind.
An irony of Mr Trump’s attack on Amazon is that the company really does have many questions to answer - on tax, market dominance and the use of US taxpayer dollars to subsidise its ‘free’ shipping - but it may emerge from the President’s tweet-fest as a perceived victim and so avoid the scrutiny it probably deserves.
A second irony is that the President has failed to understand the ‘picks and shovels’ benefits the post office has enjoyed as a result of its relationship with Amazon. While letter volumes in the US have fallen from over 200bn items in 2008 to 150bn in 2016, the number of parcels delivered has soared - from 3.3bn to 5.2bn over the same period. Amazon accounts for nearly half of all e-commerce sales in the US so the deal signed between the company and the post office in 2013 (including Sunday deliveries) was a life-saver for America’s largest non-military employer. No wonder the terms are secret.
Finding the next Levi Strauss is not always easy for a couple of reasons. Many of the beneficiaries of technological disruption are not quoted companies and many of the victims are. My son, paying his way through university with a Deliveroo box on his back, is very happy with the changes sweeping the restaurant sector. The mid-market chains like Prezzo losing custom to the eat-at-home trend are less pleased.
The other challenge is finding second-order winners at a sensible price. The yields on the hottest parts of the commercial property market - like the warehouses springing up around the motorway network to service the likes of Amazon - are so low as to be firmly in bubble territory already.
Inevitably, many of the beneficiaries will be small businesses that we have never heard of. The headlines will be grabbed by the customer facing brands while the hard work is done in the background by companies whose names are new to us. We will all have heard of Apple Pay but not the myriad tech businesses that enable it to manage payments and fight fraud. We all know that Netflix is spending billions on content but probably couldn’t name any of the studios funded by the streaming service’s huge cash outflows.
But some of the winners are already major companies - businesses like Oracle and Cisco. They are off the radar because they produce things we don’t understand or particularly care about. But without their ‘picks and shovels’, the highly-rated Amazons, Apples and Netflixes could never justify their high-octane valuations.
