Embrace Investment Bubbles (But Maybe Don't Invest In Them)

from the all-depends-on-your-perspective dept

For years we’ve been suggesting that investment bubbles are actually a very good thing. While it may suck for individuals who happen to have bet wrongly (or just timed things poorly), the net impact for the economy is actually quite good. That’s because investment bubbles allow for a lot of ideas and companies to get tested very, very quickly to see what works and what doesn’t. This way you get a lot of competition rapidly innovating as it tries to make use of the money and out-innovate everyone else. It certainly does suck for the investors and employees who are connected to the losers, but the overall impact is great. The successful innovations that come out of bubbles continue to live on. It’s a fun idea that is fun to bring up every time people start worrying about the next bubble.

Of course, while all we’ve done is mention it here and there on a blog, Slate columnist Daniel Gross went out and did some research in order to write an entire book called Pop!: Why Bubbles Are Great For The Economy which he’s now summarized in a column. His book (obviously) digs a lot deeper into this issue, and he highlights two additional areas beyond the “rapid testing” focus that I’ve discussed. He notes that bubbles consistently have been periods where tremendous infrastructure growth occurs. Once the bubble goes away, the infrastructure stays. Another area where bubbles are beneficial is that they educate the masses about these innovations much faster than in non-bubble times. That is, bubbles act as their own marketing effort, getting individuals excited about the innovation and more willing to check it out and make use of it than otherwise. Again, there are losers when bubbles pop — but the net effects tend to be quite positive. So, while we are certainly among those guilty of warning about the latest signs of bubble mania, that doesn’t mean the overall impact of bubbles is necessarily a bad thing. Of course, the real lesson in all of this might be that you shouldn’t necessarily invest in the bubble era — but in the surviving infrastructure right after the bubble pops. That’s when it’s at its cheapest and people are least likely to realize how valuable it really is.

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Comments on “Embrace Investment Bubbles (But Maybe Don't Invest In Them)”

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Peter Amstutz (profile) says:

part of the business cycle

I recently had a very interesting conversation about venture capital with someone who explained how, at least in the case of startups, there is a natural inflate/deflate cycle. The reason is that venture capitalists have a big pile of money to invest, but once they invest it, it is tied up in those companies for N years (where N ranges from 3 to 7) so there is an investment drought until they achive liquidity and the cycle begins again.

Also, it’s clear from a macroeconomic view that getting money out of the pockets of rich people (where it’s just sitting there) into the hands of workers should have a net positive effect on the economy, even some businesses do go bust. That’s how the American capitalist system works.

RandomThoughts (user link) says:

Average Joe investor makes his money by investing for the long term which bubbles really don’t play a part in (unless you have to cash out during a low) but Wall Street makes its money on the ride. Jim Cramer made his money during the bubble years.

When things are peaking, they go up higher than they should and stay there longer than they should. The same happens on the bottom. It has nothing to do with the marketplace or the companies, its the way the Market works.

Like Cramer said, its not about fundamentals or the companies themselves, its about the Market.

Anonymous Coward says:

Re: Re:

Jim Cramer is not that good at investing. He’s a TV personality with a marginal record. Warren Buffett, on the other hand, is an amazing investor, and one of the richest people on the planet. You know what he thinks? It’s all about the companies themselves, and long term investing. If your entire plan is to play the market, you’ll get burned eventually.

sam says:


one of the few times when i find part of what you say agreeable!

for the small guy.. investing in the ‘tech’ hi flyers doing a bubble rise is pretty much foolish. however, if you have the guts, you can invest in the infrastructure of some of the leftover companies and you can generate above avg returns. in some case extraordinary returns…

akamai, a serious wall street love affair, started at ~40, and went to ~300, before crashing …

if you had the guts/foresight/nerve, then you could have picked it up for ~1.00.. and rode it to 20-50… which is a better rise than when the company 1st went public…

in some instances, the market tends to treat some of these companies like startups… which they are, but in some cases, the heay infrastructure play is already accomplished when the 2nd life of the company begins…


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