Digging gold or sell shovel?

March 29th, 2007

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In 1848, gold was discovered in California. Soon, news about that spread around and led to a gold rush. People from all around the United States and abroad came to California to dig for gold, hoping to strike it rich. With too many gold diggers competing with each other, very few of them actually attained great wealth. However, there is a class of people who became rich?the ones who sell shovels and other equipment to the gold diggers.

Today, we see a parallel in the stock markets. As we said before in Have we escaped from the dangers of inflation?:

… it looks to us that nowadays, everyone is ?playing? the stock market, many using leverages like CFDs and margin lending. We hear stories of novices ?investors? opening a trading account to ?learn? how to trade.

Today?s stock markets are akin to California during the mid-1800s and many retail traders/investors are like the gold diggers of that time. With so many of them competing against each other, we wonder how many actually strike it rich? Worse still, many of them think similarly, using the same technical analysis techniques and even reading the same analysis reports. In a rampaging bull market that is created by runaway gush of liquidity from central bankers? money printing press and bankers? never-ending credit creation, it seems easy and safe to get rich right? But rest assured, just like the gold rush, the rampaging bull market will one day die off too. When we see speculation and shuffling money replacing hard work, industry and wisdom as the preferred method of attaining wealth, we know the end is closer than the beginning.

But in this environment, we observed a group of people that made a lot of money with almost no risk?the shovel sellers. Today, trading/investment ?education,? stocks tip sheets and recommendations are big business. With so many traders, investors, speculators and gamblers in the stock market, the demand for the services of these big businesses have never been greater than before. There is no doubt that many of them are indeed influential, perhaps even bordering on manipulative (see Stock tip-sheets?influential or manipulative?). Many of them are honest businesses. Some of them, though honest, offer bad quality products. Perhaps a few are frauds. Even fewer are the ones that offer truly outstanding products.

If you want to dig for gold, make sure you get the best shovel. Or better still, be the shovel seller.