The best way to make money investing is to know something’s going to pay off before it actually does. But that’s impossible, no one can predict the future, right?

Not per se, but occasionally there are early signs, right there for all of us to see, that a new product or technology may be what my colleague Andy Obermueller, editor of Game-Changing Stocks, calls “the next big thing.” All we as investors have to do is be aware of those signs and investigate how best to get in on the ground floor, when appreciation potential is the greatest.

Right now, there are early signs of an imminent explosion in “4G,” the fourth generation of cellular wireless technology. Although only a few years have passed since its predecessor, 3G, became big, the 4G explosion is coming fast. The earliest 4G devices are already out, and wireless providers have begun making big investments in 4G infrastructure. But rather than placing your 4G bets on the slow-moving shares of telecom giants such as AT&T (NYSE: T) and Verizon (NYSE: VZ), I think directly investing in the companies behind the development of 4G technology is the smarter way to go.

Why would the telecommunications industry start aggressively pursuing 4G when 3G is still relatively new? In a word, speed. Wireless users want more of it, a lot more. And 3G just doesn’t measure up.

Sure, 3G is fine for texting and emailing, and it’s serviceable for accessing the Internet. But it’s primitive next to 4G. In an article published recently on the website of credit information firm Experian, tech writer Tom Whitfield likened the disparity between 3G and 4G to “the difference between a farm tractor and a Lamborghini.” Indeed, 4G can handle a variety of functions far better, such as streaming video, web content, video calls and multiplayer games. Plus, carriers typically haven’t yet capped the amount of monthly data subscribers can use, like they have with 3G.

There are currently two main types of 4G — Long-Term Evolution (LTE) and Worldwide Interoperability for Microwave Access (WiMax). LTE is the newest broadband technology created by the mobile device industry. WiMax is the latest iteration of wireless fidelity, or WiFi, used to create wireless networks for homes and businesses. Whereas LTE was only introduced a few years ago, WiMax has been around for nearly eight years.

Since there’s no doubt about the superiority of 4G, the big question is really whether to place your bets on LTE or WiMax. The latter might seem like the obvious choice since it has nearly 10 times as many subscribers — 6.8 million compared with 700,000 for LTE as of the end of 2010. However, things could look a lot different in a few years because of LTE’s major download speed advantage of 5-12 megabytes per second (Mbps), compared with 3-6 Mbps for WiMax. (3G is only good for 0.6-1.4 Mbps.)

Because LTE is so much faster and two-thirds of carriers worldwide have committed to it, analysts foresee a complete reversal by 2014 in which LTE has almost 10 times as many subscribers — a projected 303 million compared with 33 million for WiMax. By then, global LTE infrastructure spending is expected to hit nearly $30 billion, from $1.5 billion now.

 
Source: Superfast Mobile Broadband Infrastructure Spending to Hit GBP17bn in 2014, go Gadget News, April 12, 2011

I see telecom equipment firms Alcatel-Lucent (NYSE: ALU) and Ericsson Telephone (Nasdaq: ERIC) as the two best plays on the coming 4G boom. Both create the infrastructure — such as cell towers, base stations and software — necessary to implement LTE, and both are already top LTE providers, boasting market share of 30% and 40%, respectively. Both have strong relationships with big telecommunications firms that are committed to LTE. Ericsson, for example, is the main LTE provider for Verizon AT&T and Texas-based MetroPCS Communications Inc (NYSE: PCS). AT&T and Verizon are major customers for Alcatel-Lucent, too.

Alcatel-Lucent also stands out because of its fast-growing customer base (the firm has more than 60 LTE trial agreements and commercial contracts in the works), unique miniature cell towers (used to fill coverage gaps) and broad product portfolio. Ericsson is becoming known for, among other things, newer, smaller and more energy-efficient base stations (which amplify broadband signals). Importantly, these base stations are typically 4G-compatible. With a market capitalization of $44.5 billion, Ericsson is the third-largest player in the telecom equipment space and can usually beat smaller competitors on price.

Action to Take –> Industry analysts have described the transition from 3G to 4G as “inevitable.” Since the transition is just getting underway, now’s the time to get in on the ground floor by investing in companies like Alcatel-Lucent and Ericsson that are positioning themselves as leaders.

If greater safety is your thing, I’d go with Ericsson and consider avoiding Alcatel-Lucent altogether. The latter is much riskier right now because it’s in the early stages of a turnaround that looks viable, but the company simply is not in nearly as good financial shape as Ericsson. However, it does have much greater total return potential and, according to analysts, could jump more than 200% in the next three to five years, compared with perhaps an 85% gain for Ericsson in that time.

[P.S. — My colleague Andy Obermueller also thinks the commercialization of space is another “next big thing” investors need to have on their radar, and he’s offered some picks to readers of his Game-Changing Stocks newsletter. To find out more, click here.]