Benefits of investing at different stages of the supply chain

Question

Say that I believe that the market for electric cars will explode in coming years. What are the benefits/detriments of the following investments at various levels of the supply chain?

Raw materials, e.g. raw material hoarding Cobalt 27

Mid-chain, e.g. electric vehicle battery producer Valence Technology

End product, e.g. investor-baffling Tesla

I imagine that perhaps picking the most successful end-product provider could prove the most profitable and perhaps the raw material sourcers may be more reliable - though less prone to insane returns - due to many others in the supply chain depending on them, but is it so simply a risk/reward tradeoff? Or is this completely wrong?

Answer 1

An old truism is during a gold rush, don't look for gold, but sell picks and shovels to the miners.

So trying to figure out what companies all the electric car manufacturers would need to do business with could be very profitable. But remember that investing involves risk and plan accordingly.

As far as raw materials, these tend to be very cyclical. If you get in at the right part of the cycle, they can be very profitable. But you have to understand the industry and have looked at past cycles to be able to assess where in the cycle you are. They also require patience as it can be years from the point where everyone hates the industry (and hence it is cheap) to when everyone loves it and you can unload your shares profitably. You might want to look at Peter Lynch's books to see how he plays cyclicals.

Answer 2

The risks are the same with any stock investment and picking specific industries, companies, and sectors associated with an anticipated boom requires the examination of many factors.

One example is leadership. A person could rightly choose a supply sector for a booming end product, but overweight a company that is poorly lead and lags its direct competitors and possibly the market. Meanwhile the competitors are handily beating the broader market.

There are many others which can be learned about in numerous resources from the likes of Lynch and Buffet. However, it is important to note that their "rules of thumb", may not quite be applicable.

For me, it is much more profitable to concentrate on what I do best, my full time job, and mostly mindlessly purchase a sensible asset allocation model of mutual funds at regular intervals. It is not quick or sexy, but it does work.