Wednesday, October 15, 2008

On to the Next Bubble

As we pick up the pieces from the end of the housing bubble, many investors who left the stock market are trying to figure out when to get back in. If they want to outsmart the market, maybe they should really be trying to anticipate the next bubble.

We had a bubble in internet-related companies about a decade ago and then the recent housing bubble; another bubble of some type is sure to come along. The real money will be made by anyone who can anticipate the next bubble, buy in early, and sell at the height of the mania.

Apart from the timing issues, a big challenge is to figure out where the bubble will be. Here are a couple of possibilities:

Water. As global warming continues, fresh water may become scarce. Companies that buy up water rights or make grand plans to float giant icebergs through the ocean could attract crazy valuations.

Alternative Energy. As China’s demand for oil continues to rise, supplies will be pushed to the limit, and prices are destined to rise much more than we’ve already seen. Politicians are already saying that we need to develop alternative sources of energy. As oil prices rise to the point where alternative energy technologies become profitable, we may fall in love with any company that can spell “solar” or “wind”.

Recently, I’ve seen two others suggest that alternative energy may be perceived as the next big thing. Canadian Financial DIY asks if the cynical investor should gamble on alternative energy as the next bubble, and Scott Adams captured this idea in three Dilbert cartoons (first, second, and third).

I have so much confidence in these predictions that I’m allocating 0% of my portfolio to them.


  1. I believe that alternative energy has all the right ingredients to be the next bubble. Endless potential, warm and fuzzy feeling, 'the future', and in its infancy as far as being practical and ubiquitous. What could cause the bubble to burst is a massive drop in oil from very high sustained levels.

  2. MG: You may be right. If alternative energy does indeed start to bubble up, I think I'll just invest elsewhere. I don't believe that I could get out before the bubble bursts.

  3. Hi Michael, it's nice to get noticed. The big problem is as you say, even knowing that a bubble will occur for sure, the bigger problem is knowing when to get out. Many studies of game playing show that people in a game where they absolutely know they are paying too much still over-bid on the premise that they avoid being the last fool out.