I previously shared the first category of assets.

Today we look at the second category of assets—assets that have utility value but do not generate cash flow.

The essential difference from the first category of assets lies in the existence of "utility value," and it is this distinction that gives strong data support and reasonable logical deduction based on this data for investing in such varieties, allowing investors to have clear standards and measurable scales for these types of investments.

Various commodities (such as copper, aluminum, silver, grain, oil, natural gas, etc.) fall into this category.

This type of asset has a clear utility value, so there is a clear supply and demand relationship and long-term accumulated data based on this supply and demand relationship, such as output, usage, cost price, market price, supply and demand gap, etc.

Based on this data, investors can roughly judge whether this type of asset might be undervalued or overvalued through mean reversion methods and determine based on historical data:

Once prices deviate too far from the mean and severely deviate from the supply and demand relationship, there is a high probability that prices will return to normal values in the near future.

At this time, the price difference between the severely deviated price and the normal mean is the opportunity that investors can grasp.

Buffett occasionally participates in this type of asset.

The most typical case is when he bought a large amount of silver when the supply and demand relationship was quite tight but the price was severely undervalued, and later sold during the process of price returning to normal, making a significant profit.

He used this data and the logical deductions based on it.

I have mentioned in past articles that the investment opportunities in oil and precious metals (platinum) are based on the same reasoning.

However, the upper limit of these assets is also very obvious; according to historical patterns, during normal and peaceful times with a stable society, it is difficult for these types of assets to increase by 100 times over 20 to 40 years.

Furthermore, the investment opportunities in these assets do not come from the compounding of time but from abnormal price differences caused by market distortions. And these price differences often last a very short time, sometimes only a few months, or a year, at most a few years, rarely lasting for 10 years or even longer.

Why is that?

Because they are mostly industrial products; once prices deviate too much, the laws of the market will naturally come into play:

If supply is too abundant, the market will eliminate producers; if demand is too high, many producers will rush into the market.

This will bring prices back to normal averages within a certain period, and this situation will not last too long.

Therefore, this type of asset generally does not meet the conditions for a 100-fold increase in 20 to 40 years.

Investors participating in this type of asset often just play a game, joining in for fun; when they see good opportunities, they participate, but they will not deliberately seek them out when there are none.

Munger jokingly described Buffett's purchase of silver as a whim, picking up a "cigarette butt."

To seize these opportunities, investors need to pay long-term attention to these types of products and have a considerable understanding or judgment ability regarding their historical background and supply and demand data, thus being able to discover opportunities that others have not yet noticed in the rapidly changing market environment.

This is also very difficult for the vast majority of ordinary investors.

In summary, this type of asset does not meet the conditions for a 100-fold increase, nor does it provide opportunities for the vast majority of ordinary people to participate.

Thus, the vast majority of investors are unlikely to achieve a hundred-fold return from this type of asset.

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