Standard wisdom says that when economic bubbles occur, they cause economic fallout and negatively affect the economy. That’s usually correct widsom in the short term, but history has proven that in the medium to long term, bubbles have a great effect because they change the mental landscape and lay down the groundwork and infrastructure to allow for lasting growth.

Daniel Gross comments on this in an article for Slate, and makes some great points and ones that we can take into consideration when we analyze the real estate bubble of today and the alternative energy bubble of tomorrow. Going back to the telegraph, railroad, and now the web infrastructure, Americans saw multiple companies sprout from entrepreneurial minds, with the majority of them staggering towards bankruptcy. However, after each of these cycles, we saw a renaissance of better organized and capitalized companies come into place to take advantage of the mental mindset change and the infrastructure that had been built. Take all the fiber that had been laid down in the late 90’s. At the time we saw massive bankruptcies in the fiber optic space. Now, all those lines are being used to capacity.

Great history lesson, but how do you apply this to current times?

The first lesson is to stay away from alternative energy companies. Don’t invest in them and don’t even talk about them. The majority of them are being funded by government campaigns to satisfy the Al Gore constituency. While in relative terms some of the eco-energy products helps save the environment, in absolute terms they don’t. The production and consumer costs is usually greater than the original cost of non-alternative energy means. Now remember, you’re still doing a great service to society by buying these products. You’re participating in the bubble and you’re bringing producting costs down! Eventually, these products will achieve absolute cost savings and we’ll all utilize them.

The second lesson is the real estate bubble. Yes, we’re in the middle of a prolonged “recession” in residential real estate prices. However, this is where the opportunity is. Find asset enriching properties where the CASH FLOW is positive (not just the cash flow plus depreciation) and purchase them. You’ll still find that to be a great conservative and safe long term investment.

Happy hunting!