When one looks at the dynamics of investment bubbles over the past 150 years, it becomes clear that history repeats itself. During the boom years of the telegraph in the late 1840s, businessmen routinely backed local efforts to string up telegraph wires—only to see the fledgling companies go bust. In the 1880s, amid a railroad boom, many of the nation’s wealthiest individuals got caught up in the frenzy of line building, which led to excess capacity, vicious rate wars and widespread bankruptcy.

Yet historically speaking, the damage wrought by bubbles and their crashes is only half the story. When investment bubbles leave behind excess capacity and commercial infrastructure that others can use, they turn out to be remarkably beneficial; in 2001 there was enough fiber-optic cable laid to last a generation. What’s more, the money spent on promotion during bubbles draws in new users, who tend to stick around. Even as Global Crossing, WorldCom, Webvan and so many other companies went bust in 2001 and 2002, millions of Americans were creating online accounts and conducting transactions on the Web. The combination of cheap infrastructure and a large installed base of users can create excellent conditions for starting new businesses.

History provides a rough guide as to what kinds of companies make good investments after bubbles burst:

• Consolidators. In the cases of the telegraph, railroad, dot-com and fiber-optic bubbles, demand for the services continued to rise post-bust. When new operators were able to assume control of the failed infrastructure providers, they rationalized operations, shed debt and eliminated competition. In the 1890s, J.P. Morgan, Jacob Schiff and Edward Harriman picked through the railroad wreckage to assemble large, profitable, integrated systems on the cheap. Charles Merrill, founder of Merrill Lynch, positioned himself nicely for a long-term revival by consolidating the brokerage business in the late 1930s. In this decade, Global Crossing, which acquired new management and ownership after its bankruptcy, has successfully acquired distressed assets.

• Bandwidth hogs. During infrastructure bubbles, bandwidth hogs—companies whose business models rest on distributing and transmitting products and services through a commercial infrastructure—are easily frustrated. For example, some rival telegraph systems refused to interconnect, and competing railroads ran on different-gauge track. But in the long term, bandwidth hogs are among the biggest beneficiaries of the excess capacity left behind. The costs they pay to ship goods and services plummet, while the promotional efforts of failing infrastructure builders attract new users. After the telegraph became a cheap, pervasive utility, power users such as news services and stock brokerages became successful businesses. Railroad bandwidth hogs—everyone from Sears and Montgomery Ward to shippers of cattle—thrived after railroads became reliable, seamless networks. In this decade, a host of businesses that count on universal, cheap broadband services have attracted investment and minted money for their founders. Among them are Google, YouTube, MySpace and Skype.

• Those who serve new users. Businesses that provide services to bandwidth hogs seem small during the bubble and even smaller during the bust. But they can be big post-bust winners. The railroad didn’t just prove to be a boon to mail-order retailers and food processors; it provided opportunities for travel agents and shipping companies. In this decade, companies that enable people to set up shop on the Web or those that help businesses conduct transactions online have prospered by servicing new users who continued to flood into the medium after the dot-com bust. While many of today’s alternative energy infrastructure firms may fail, businesses that maintain and upgrade residential solar installations, or those that provide kits that allow cars to run on ethanol, may succeed in the long run.

The philosopher George Santayana famously noted that those who forget the past are condemned to repeat it. When it comes to investment bubbles, those who remember the past may be best positioned to avoid pain during the frenzy—and to profit during the subdued aftermath.

Daniel Gross, who writes the Moneybox column for Slate and the
Economic View column for The New York Times, is the author of
the new book Pop! Why Bubbles Are Great for the Economy.