I previously shared the first category of assets.
Today we will 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 is the presence of "utility value," and it is this distinction that leads to strong data support for investing in such varieties and reasonable logical deductions based on this data, allowing investors to have clear standards and measurable scales for this type of investment.
Various commodities (such as copper, aluminum, silver, grain, oil, natural gas, etc.) belong to 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 relationship, such as production levels, consumption, cost prices, market prices, supply-demand gaps, etc.
Based on this data, investors can generally use the mean reversion method to judge whether this type of asset may be underestimated or overestimated, and based on historical data, they can determine:
Once prices deviate too far from the mean and seriously diverge from the supply-demand relationship, it is highly likely that prices will return to normal values in the near future.
At this point, the price difference between the seriously 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 underestimated, and made a considerable profit by selling during the subsequent process of price normalization.
He utilized these data and the logical deductions based on them.
My previous articles mentioned investment opportunities in oil and precious metals (platinum) are based on the same reasoning.
However, the upper limit of such assets is also quite clear; based on historical patterns, in normal times of peace and a harmonious society, it is difficult for this type of asset to increase by 100 times within 20-40 years.
Moreover, the investment opportunities in these assets do not come from the compounding of time but rather from market distortions resulting in abnormal price differentials. And these price differentials often last for a very short time, sometimes only a few months, or a year, and at most a few years, rarely lasting 10 years or even longer.
Why?
Because they are basically industrial products, and once prices deviate too much, market principles will naturally come into play:
Excess supply will eliminate producers; excessive demand will attract many producers into the market.
Thus, prices will return to normal mean levels within a period of time, and this condition will not last too long.
Therefore, this type of asset basically does not meet the conditions for a 100-fold increase in price within 20-40 years.
Investors participating in this type of asset often just play a game, adding some excitement, and if they see a good opportunity, they will participate; otherwise, they will not actively seek it out.
Munger jokingly described Buffett's purchase of silver as a momentary whim, picking up a "cigarette butt."
To seize such opportunities, investors need to pay long-term attention to these types of varieties and have a considerable understanding or judgment ability regarding their historical data and supply-demand relationships, thus enabling them to identify opportunities that others have not yet noticed in the ever-changing market environment.
This is also very difficult for the vast majority of ordinary investors.
In summary, this type of asset neither meets the conditions for a 100-fold increase in price nor provides opportunities for most ordinary people to participate.
Therefore, the vast majority of investors cannot achieve a hundredfold return from this type of asset.
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