What is proxy investing?

In a proxy investment - you do not invest in the main opportunity (EV CAR for example) but in opportunities that support that gold rush of main opportunity (software, ev auto parts and battery). An inherent benefit for proxy investing is the possibility of higher and stable returns with a lesser degree of risk, than actually investing in the underlying gold rush.

Before we further proceed with examples of proxy investing.

Lets look at a mental model available in psychology that will really help in evaluating proxy bets for yourself. The mental model is called - second order thinking. Second Order thinking states that for every first order consequence, there are second and third order effects.

Here is the legend, Howard Marks, explaining the concept of second order thinking.

To help explain this further, lets draw parallels from our automotive example above.

First Order : Demand for automobiles rising

Second Order : Demand for tyres will rise

Third Order : Demand for rubber will rise

By applying second order thinking, you can evaluate the consequences of the first action and extrapolate the second and third order effects from it.

This can help you identify and decide the proxy investments for the gold rush of our times.

There are 100s of EV manufacturers already and some of them have gone public. But what are the second and third order effects of this EV gold rush? This is just my view but most likely batteries will be the second order effect. Batteries are hard to manufacturer & IPs of most battery manufacturers (esp. the new ones) is a guarded corporate secret. For every 1000 EV manufacturers you may find only a handful battery companies.

What about third order effects?

This is much clearer. Commodities like copper and rare earth metals that find an application in EV and battery manufacturing will certainly benefit. Here too, for every 10 battery manufacturers you will find maybe 1 rare earth extraction company.

As you scale down the value chain, you will find competition reducing and there by reducing the risk on your proxy investment.

EV Company : High Competition & High Risk

Battery Company : Medium Competition & Medium Risk

Rare Earth Company : Low Competition & Low Risk

Proxy play Example:

1. CAMS as a proxy to Mutual Fund Industry.

2. Galaxy Surfactants as a Proxy for FMCG companies.

3. for paints , Moldtek Packaging

4. GMM Pfaudler, HLE Glascoar for pharma company

5. KPIT is proxy for EV software

6. Polycab is proxy for housing market

7. Contract manufacturing can be proxy for corresponding sect