Back in the mid-1800s, a new era of prosperity swept through the Wild West of California. The now-famous gold rush, which attracted millions of people hoping to strike it rich by panning for treasure in the rivers outside Sacramento, took the region by storm. At the time, it seemed like the dawn of an instant path to fortune.
A select group of miners did indeed make a fortune, but as the word caught on and millions flooded the river banks, many more were left cold, tired, and penniless. Like many new concepts, the gold rush followed a boom-to-bust cycle that left too many people questioning what all the hype was about.
Less shine, more dime
One man, however, saw this coming. Sam Brannan, who helped publicize the gold rush among the general public, became one of the richest men in America. He gained his wealth not from the relentless pursuit of gold nuggets, but by supplying those eager miners with their equipment -- everything from pickaxes to overalls and gold pans. Ironically, Brannan became wealthier than any individual gold miner did, and he eventually became the richest man in all of California.
Similarly, in the early 1900s, Howard Hughes Sr. made an incredible fortune in the oil industry -- but not by searching for fields of black gold, as many others unsuccessfully tried to do. He did it with the 1909 formation of the Sharp-Hughes Tool Company, which became the industry leader in drill bits that were needed to tap oil fields. The company later merged his patented drill-bit technology with other oil-service companies, forming the Baker Hughes (NYSE: BHI) corporation in 1987. Baker Hughes still remains a leader in oil-service products to this day.
That's fantastic, you say, but until gold nuggets start freely flowing down the river again or we find a new type of fuel to pump out of the ground, what's it to me? Well, look a little closer.
Your obnoxious, spoiled cousin
These examples highlight an incredible phenomenon in business, one that especially takes hold during boom eras like the current real estate/debt debacle. Although it might sound slightly counterintuitive, oftentimes when a particular industry finds itself in the spotlight, it's a lesser-known cousin industry that can end up reaping the biggest rewards. Most importantly, when one line of business becomes overcrowded by hype and fanfare and the easy profits get squeezed out, the side industries that serve the big enchilada may remain well-suited to please shareholders.
Take Cisco (Nasdaq: CSCO), for example. By making the switches, routers, and connectors that make the Internet a reality, Cisco has become an Internet side industry that makes its way behind the scenes into the lives of nearly every person and company that logs on to the World Wide Web. Yet the Internet's most successful companies don't even come close to matching the massive profits Cisco cranks out. In 2006, for example, Cisco churned out more net income than Google (Nasdaq: GOOG), Yahoo! (Nasdaq: YHOO), eBay (Nasdaq: EBAY), and Amazon (Nasdaq: AMZN) combined. Cisco feeds off the success of the Internet without being an actual Internet company -- and it has done so with astounding results.
The airline industry certainly isn't a breakthrough technology, but it provides a similar concept. While many airlines, like Delta (NYSE: DAL) and United Airlines parent UAL, have suffered staggering losses amid soaring energy prices and rising competition, companies that provide airline-related services, like HEICO Corp and Expedia (Nasdaq: EXPE), have remained increasingly profitable over the years. Same goes with the auto industry. GM and Ford continue to languish and seek direction, but auto-parts suppliers like Advance Auto Parts and Autozone have sustained healthy profits year after year.
Simple tycoons
The phenomenon holds true for dozens of industries. How many times have you heard about an athlete's outrageous salary? Well, the really big score might lie behind the scenes, with the agents who collect a tidy portion of their clients' salaries without being subject to six-day-a-week workouts or an endless blitz from the prying media. Tiger Woods no doubt earns his outrageous paydays; he deals with hardcore training sessions and incredible amounts of pressure. But his caddy, Steve Williams, has been reported as the highest-paid New Zealand sportsman -- just from schlepping Tiger's clubs around.
How can you put this concept to use in your own investing? Always keep in mind that there may well be several different ways to profit from one industry, even if that main industry isn't exactly a star performer. The big scores lie where others aren't looking. As the old saying goes, "What's popular isn't always profitable, and what's profitable isn't always profitable."
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