Backbone Investing: A Third Way Beyond Value and Growth

Investors are accustomed to thinking in terms of value or growth. Value investing looks for companies trading below their intrinsic worth, while growth investing attempts to identify the future winners of transformative trends, firms expected to expand rapidly, even if their valuations appear stretched. Both approaches have shaped decades of market thinking. Yet both, and especially growth, face limitations in today’s world of accelerating technological cycles. Even when an investor correctly anticipates the direction of a major trend, choosing which individual company will emerge as the long-term winner is extraordinarily difficult. Markets are littered with early frontrunners that later collapsed under competition, mismanagement, or shifts in technology.

This difficulty becomes evident when looking at past technological revolutions. During the railroad boom of the early 20th century, vast amounts of capital poured into railway operators. Many of these firms no longer exist: Penn Central fell into one of the largest U.S. bankruptcies of its era, the Erie Railroad dissolved after chronic financial troubles, and iconic operators like the Baltimore & Ohio Railway were absorbed after repeated restructurings. Yet the companies supplying the backbone of that expansion, Carnegie Steel (later U.S. Steel), Bethlehem Steel, and General Electric, enjoyed decades of growth. These firms did not need to guess which railroad would dominate. They simply provided the steel, machinery, and electrical systems that every operator required.

The same pattern repeated itself a century later during the dot-com boom. Investors fought to identify which websites would rule the digital future. Many of the supposed champions collapsed spectacularly. Pets.com became the emblem of dot-com failure, Webvan burned through a billion dollars before disappearing, eToys imploded, and even giants like AOL and Yahoo eventually lost relevance. Meanwhile, the companies building the physical backbone of the Internet (Cisco, Corning, Intel, Texas Instruments, and EMC) thrived because their products were indispensable to the entire ecosystem. Whether Amazon succeeded or failed was irrelevant to the demand for fiber-optic cables, routers, semiconductors, and servers.

The present AI and semiconductor boom reflects the same dynamic. Dozens of AI application companies, LLM startups, and platform challengers are competing for relevance. Many of them may never achieve a sustainable business model. Yet the backbone of the AI revolution (the chips, high-bandwidth memory, energy systems, and data-center infrastructure) remains the real foundation of growth. Nvidia’s GPUs, TSMC’s manufacturing capacity, ASML’s lithography machines, SK Hynix’s memory modules, and the global expansion of power providers and data-center operators represent the layers of technology that every AI model depends upon. Regardless of which chatbot or model eventually dominates, this backbone must scale.

These historical patterns point toward a distinct investment philosophy "backbone investing" that sits alongside, but separate from, value and growth. Unlike growth investing, which requires identifying the ultimate corporate winners, backbone investing focuses on the indispensable suppliers that enable entire sectors to expand. The rationale is simple: predicting the trajectory of a technological wave is far easier than predicting which end-product company will capture the majority of value within that wave. Backbone investing shifts the problem from selecting a single future champion to understanding the structural needs of an emerging industry.

To formalize backbone investing as an investment framework, it helps to view it as a coherent sequence of analytical steps rather than an intuition. The process begins with recognizing a long-term secular trend: whether artificial intelligence, electrification, biotechnology, automation, or any other transformative force shaping the economic landscape. The investor’s primary task is to understand where the world is heading, not which specific company will dominate the endpoint.

Once the direction is clear, the next step is to map what might be called the “industry backbone”: the essential raw materials, technologies, and infrastructure without which the sector cannot function. Every major technological shift has bottlenecks: steel in the railroad era, fiber optics during the Internet expansion, and chips, HBM memory, energy capacity, and data centers in the age of AI. These are the true constraints on growth, and they are usually controlled by a small number of highly specialized companies.

The third step is identifying the suppliers that sit at these chokepoints. These companies are often entrenched, enjoy high barriers to entry, and serve a wide range of customers across the sector. Their revenues are not dependent on which individual firm wins the competitive race; instead, they benefit as long as the sector itself expands. In practical terms, backbone investing reduces idiosyncratic risk and shifts exposure toward broad structural growth.

A final element of the framework is resilience. Backbone companies tend to enjoy more stable demand, more diversified customer bases, and stronger pricing power than the companies trying to capture end-customer attention. They scale with the industry, not with market hype or consumer preferences. Over long horizons, this produces smoother and more durable compounding.

In this form, backbone investing becomes more than a heuristic. It becomes a systematic way to capture the value of innovation while avoiding the pitfalls of winner-picking. It provides exposure to technological revolutions, but with a foundation in companies whose role is structural rather than speculative. Across more than a century of economic history, from railroads to the Internet to AI, the pattern is unmistakable: while many front-end companies fail, the suppliers of the backbone consistently thrive.

Backbone investing offers a path to participate in the future without needing clairvoyance about individual corporate outcomes. It focuses on the building blocks (the steel, the fiber optics, the chips, the energy) that every future winner must rely on. And in a world where uncertainty multiplies at the company level but remains clearer at the structural level, this approach becomes not just an alternative, but a compelling third pillar of modern investment strategy.