I previously shared the first type of asset.

Today we look at the second type of asset—assets that have use value but do not generate cash flow.

The essential difference between it and the first type of asset lies in its "use value," and it is this distinction that leads to strong data support for investing in these types of investments, along with reasonable logical deductions based on that data, enabling investors to have clear standards and measurable criteria for such investments.

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

Because these assets have clear use value, there are also clear supply-and-demand relationships and long-term accumulated data based on these relationships, such as production, consumption, cost price, market price, supply-demand gap, etc.

Based on this data, investors can likely use a mean reversion approach to determine whether these assets may be undervalued or overvalued and assess according to historical data:

Once prices deviate too far from the mean and seriously from the supply and demand relationship, it is highly probable that the price will return to normal values in the near future.

At this time, the price difference between the seriously deviated price and the normal mean is an opportunity that investors can seize.

Buffett occasionally participates in this type of asset.

The most typical case is when he significantly bought silver when the supply and demand relationship was quite tight, but the price was severely undervalued, and he made a lot of money selling it later as the price returned to normal.

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

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

However, the upper limit for these types of assets is also quite evident; according to historical patterns, in normal peaceful times and in a well-governed society, it is difficult for these assets to increase by 100 times in a period of 20-40 years.

Additionally, the investment opportunities in these assets do not come from the compounding of time, but rather from abnormal price differences caused by market distortions. These price differences often only last a short time—sometimes just 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 fundamentally industrial products, once prices deviate too much, market forces will naturally come into play:

oversupply will eliminate producers; excessive demand will attract many new producers into the market.

Thus, over a period, prices will return to normal mean levels and will not allow this situation to last too long.

So, these types of assets basically do not meet the conditions for increasing by 100 times within a period of 20-40 years.

Investors participating in these types of assets often just play a game, joining in for fun when they see good opportunities, but will not deliberately seek them out if none exists.

Munger jokingly describes Buffett's purchase of silver as a spur-of-the-moment decision, picking up a "cigarette butt."

To seize these opportunities, investors need to pay long-term attention to these types of assets and have a considerable understanding or judgment of their historical data and supply-demand relationships, thereby gaining an advantage in a rapidly changing market environment to discover opportunities that others may not have noticed.

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

In summary, this type of asset itself neither meets the conditions to increase by 100 times nor provides opportunities for the vast majority of ordinary people to participate.

Therefore, most investors cannot expect to achieve hundredfold returns from this type of asset.

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