One of the best conversations that I ever had about real assets was with an 83 year old Amish farmer. We were standing in a field observing his neighbor’s cattle at the time.

To my mind, a real asset is one of two things:

-an irreplaceable resource, a naturally occurring resource or commodity for which there is no plentiful substitute OR

-the primary production, processing or transportation of an irreplaceable resource

This gives us a universe of 16 industry sectors: coal, precious metals, pulp & paper, timber, oil & gas, soft commodities, shipping, industrial metals, industrial gases, utilities, mining, pipelines, exploration & production, water, alternate energy and rare earths. There are probably others that I’ve missed.

Notably, my definition intentionally excludes the vast market in financial derivatives that are based on commodities, and which – in some cases – have led to criticism that their trade distorts the valuation of underlying commodities. By my calculation, oil derivative trade on one exchange (NYMEX) alone is 17x the trade in the physical commodity.

For clarity, I don’t view real assets as synonymous with green investing – though there are overlaps in areas such as renewable energy – because I believe that it’s important to include traditional energy and minerals in our definition. A green world is a great aspiration, but most of us are going to need access to oil, gas and coal for a good while yet.

As my Amish farmer buddy pointed out to me, financial analysts would probably make better investment decisions if they came to look over his farm with him occasionally. In my view, valuing such assets correctly – and finding financial structures which allow us to do so – is a worthwhile endeavor.