How Thinking Vertically in Niche Markets Informs Investment Strategies

Investing to beat market returns is about finding the right niche. You have to think how other investors  do (e.g., analyze the same fundamentals) in order to differentiate your investment decisions from theirs.

There are countless ways to do this and thousands of books and courses out there on it. Some talk about a diverse portfolio strategy. Others talk about investing in specific industries. Be it as it may, differentiating your own investment strategy can be challenging.

One creative way to solve for this challenge is to find investment opportunities vertically for goods in niche markets.

Let’s illustrate this with the example of bullets. More specifically, let’s look at firearm cartridge for hunting.

The raw materials (commodities)

Firearm cartridge is by no means a simple good. It’s something that humans are constantly trying to perfect. Consider the 8mm mauser, a rifle cartridge that the German Empire adopted in the early 20th century, had widespread military use throughout the century, and continues to be a popular bullet for deer hunters around the world.

This ammunition is composed of a number of a number of industrial metals traded on the commodity market. For example, recycled steel is often for the bullets shell, which is then then coated in copper. The inner core can be composed of lead.

As you can see, once you start to understand the raw materials of any given good you can start to ask yourself all sorts of questions: Who mines the good? Who are the big players involved in distributing it? How about the producers? And how do these all fit together?

Placing the goods into a global markets context (equities)

We need to look at these goods in the the perspective of the markets in which they are relevant. For example, a bullet has no value without a rifle. These are supplementary goods that can then be considered together.

In this case, we could consider these in the market for outdoors and hunting. We can ask ourselves: How is this market trending? Who are the top publicly traded companies in this market? Who owns the supply chains? How about distribution? Given this knowledge, how can I diversify and hedge my positions within this market?

Summing it all up

To beat the market, you have to think differently from other investors. And to think differently you have to be creative. Creativity takes knowledge, and usually knowledge in a specific area of expertise. Thinking vertically in niche markets can provide those creative constraints you need to find alpha. Bullets are only one example. Hopefully this helps you to find your niche.

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