The Big Short was one of the eight movies for the Best Picture Oscar at the 88th Academy Awards in 2016.
The Big Short: Inside the Doomsday Machine, the basis for the film, relates the tale of four investors who correctly forecast the collapse of the credit and housing bubbles in 2008 and chose to gamble against Wall Street, making billions of dollars in the process.
Dr. Michael Burry, whose character is depicted by Christian Bale in The Big Short, was the first of these investors to correctly foresee the housing boom.
The film's final line, which is printed on a placard and reads: "Michael Burry is focusing all of his tradings on one commodity: Water," left many viewers perplexed. While the movie does a great job of explaining how Michael Burry was able to make nearly $1 billion betting against the housing market in 2008, it left many viewers very confused about a completely different issue.
This is a confusing assertion since there is no market for trading water, in contrast to other commodities like oil, cotton, or silver.
So how can one make investments in water? Should you just get a rain barrel?
If you want to invest in water, you have three options:
acquiring water rights
Invest in farms with access to water
Invest in the infrastructure, tools, and services related to water.
However, let's first discuss why you may want to invest in water in the first place.
Reasons to Invest in Water
Depending on where you reside, you may consider access to pure, fresh water to be a given. I am aware that I often do.
We often use the statistic that water covers 70% of the planet's surface, which most people learned in kindergarten. This is accurate, and however, the freshwater we are concerned about makes up barely 2.5% of that total.
The majority of the remaining 99% of our freshwater is locked in glaciers and snowfields, making just 1% of it freely accessible. In the end, just 0.007% of the water on Earth can be used to hydrate and nourish the planet's 7 billion inhabitants.
Everyone is aware that water is necessary for life. However, 0.007% of the world's water is still a significant amount of freshwater. What, then, is the issue?
The UNUN reports that during the last century, global water usage has increased at a pace that is more than twice as fast as global population growth. We now consume around 30% of the world's renewable water supply, which might rise to 70% in less than ten years. Two-thirds of the world's population will reside in water-stressed regions by 2025, with an estimated 1.8 billion people living there.
Even worse, most wealthy nations' water infrastructure is becoming older, and neither have we taken any action to improve it. According to the American Society of Civil Engineers (ASCE), by 2020, the amount we spend on water infrastructure will fall short of what is required by $84.4 billion. Without improvements, the United States would lose $416 billion in GDP.
Do you still not consider access to freshwater to be a problem?
Just ask any resident of California, which is now experiencing ongoing droughts and wildfires.
Ask anybody who has seen one of the 195 conflicts brought on by water since 2000.
Ask Flint, Michigan citizens, who directly feel the impacts of America's deteriorating water infrastructure.
There is a rising and urgent need for access to freshwater and associated goods and services. So how does a wise investor stand to gain from it?
The Best Way to Invest in Water
Option 1 is to buy water rights.
The owner of a water right is entitled to utilize water from a water source (e.g., a river, stream, pond, or groundwater source).
A right water investor may profit by reselling (or, in certain places, renting) the water right for more money than they first invested. Municipalities, farms, or businesses might be the buyers.
Prices rely on demand, which is a consequence of both the need for and water usage. For instance, hydraulic fracturing creates a significant demand for water since it takes 3-5 million gallons of water to build an oil well, and 80% of that water cannot be recycled. As a result, fracking corporations pay up to $3,000 per acre-foot for water rights instead of farmers who only pay $50 per acre-foot.
Aside from any potential moral ramifications of selling water only to the highest bidder, there are further problems with the economics of profiting from water rights.
The primary problem is that it epitomizes the "greater fool hypothesis." The water right is worthless in and of itself. Therefore, the only way to profit from water rights is to locate a buyer prepared to pay more than you paid. This could work out sometimes, and it won't work in certain cases.
Here is a prime illustration:
T. Boone Pickens owns more water rights than anybody else in the country. While Texas was experiencing one of the worst droughts in more than 50 years in 2011, Pickens was attempting to sell the Dallas-Fort Worth region the rights to one of the world's biggest aquifers, the Ogallala Aquifer.
The state of the area's drought affected the discussions with Dallas. Every time it rained, talks broke down. Pickens finally agreed to pay the Canadian River Authority half of his first request. Later, he likened the agreement to purchasing and selling a boat, saying that the two finest days of boat ownership are when you purchase and sell it.
Along with the bigger fool argument, the water right is a contentious and highly political topic. T.
Boone Pickens is pursuing his specific method because he has a significant quantity of water rights and political clout in Texas. Additionally, water laws are very complex and vary from state to state, which raises the question of how someone may possess, purchase, or sell a resource that is a human right and essential for the survival of all forms of life.
In any event, the entrance restrictions make it impossible for the common investor to see the value in purchasing water rights.
The ancient Romans constructed aqueducts over 2000 years ago to move water from higher altitudes to lower levels. In certain places, including California, Australia, and Libya, aqueducts are still in use, along with pipelines and pumping systems.
Transporting water is not a simple task; it does not completely resolve issues without causing new ones. These are a few of the problems:
A pipeline's construction is quite expensive, often costing billions of dollars.
The cost of maintaining the pipes is likewise quite high.
A water pipeline's construction may harm ecosystems, deface landscapes, and cause obstacles, just as any oil pipeline construction might.
The fact that water pipes are made to redirect water from a certain source is very significant. This may have negative ripple effects that significantly impact the economy, aquatic life, plant life, and coastlines.
We have now reached the main point of Dr. Michael Burry's most recent "water exchange," which explains why we are discussing farming. Burry said the following on water in an interview with NYNY Magazine from December 2015:
Purchasing water rights did not make sense to me since transporting water is impracticable for political and practical reasons. I realized that investing in food is the best method to get water. Specifically, food should be grown in water-rich places and transported to water-scarce areas for sale.
The least problematic technique for transferring water is this one, and because it may eventually be lucrative, it will guarantee the sustainability of the redistribution. The amount of water used to manufacture one bottle of wine is almost 400 bottles; what I found intriguing was the water included in meals.
Dr. Michael Burry said, "I think that agricultural property - productive agricultural land with water on site - will be desirable in the future." in a different interview with Bloomberg in 2010.
Growing food in water-rich places and selling it in water-poor ones is undoubtedly the least controversial and most sustainable way of water distribution compared to water rights and water pipes.
How do we make the most of this?
Despite Michael Burry's extreme public reticence, my investigation indicates that he has been acquiring almond plantations. Why? One gallon of water is required for every almond to be grown.
Contrary to popular belief, California, experiencing one of the worst droughts in state history, produces 80% of the world's supply of almonds.
Most crops may fallow if there is a drought, and farmers can start again next year. But an almond orchard cannot be left fallow. An almond tree matures in 3 years and bears fruit for 18–20 years. The tree perishes without water, costing the farmer a significant long-term investment. In California, where surface water is restricted, growers are sinking ever-deeper wells to get groundwater to maintain their almond crops.
Now, Michael Burry's argument is very obvious. The property with the greatest access to onsite water will ultimately prevail when rival almond growers run out of water and are pushed out of the market as the demand for almonds continues to rise.
The obstacles to implementing this investment approach are similar to those for water rights. The investments would have to be done locally and regionally, and they would need significant funding. Once again, not a terrific approach for the typical investor.
The nation's old water infrastructure has come under scrutiny as a result of the recent catastrophe in Flint, Michigan, where lead from the city's outdated pipe system leached into the water supply.
The massive network of primarily underground pipes in the United States is estimated to require more than $1 trillion renovations over the next 25 years. Experts say worries about the aging infrastructure can no longer be dismissed. In reality, the American Society of Civil Engineers (ASCE) assigned the nation's drinking water and sewage infrastructure a "D" grade. It said that most of our drinking water system is reaching the end of its useful life.
Without improvements, the United States would lose $416 billion in GDP due to rising home prices, decreased worker productivity, and higher water waste. And more tragic incidents like the one in Flint, Michigan.
What kind of investments is the nation in need of? Larger pipes, better waste-water networks, and new and enhanced treatment facilities. The ASCE suggests using tax-free commercial bonds, government-backed revolving loans, the creation of a federal water infrastructure trust fund, and a body called the Water Infrastructure Finance Innovations Authority with the power to borrow money from the federal government to finance these projects.
Additionally, legislation that might allow for the privatization of water utilities is being worked on in several state capitals to enhance the performance of poorly managed public water systems (like the one in Flint).
Purchasing shares in individual water utility companies is one method to gain from these upcoming developments. Due to the significant fragmentation in the water utility sector, greater privatization might result in a roll-up strategy by bigger businesses and open up access to financing markets for infrastructure development.
This method is already being partially implemented. The biggest publicly listed water and waste service provider in the United States, American Water Works Company (NYSE: AWK), completes around 15 acquisitions annually, while Aqua America (NYSE: WTR), the second-largest utility, has completed 300 acquisitions over the previous 20 years.
Other strategies include making investments in businesses that produce water infrastructure and machinery, such as:
Calgon Carbon (CCC) is a producer of goods for the industrial, municipal, and consumer industries that eliminate impurities and aromas from gases and liquids.
One of North America's leading producers and distributors of fire hydrants, pipe fittings, and valves is Mueller Water Products (MWA).
Pumps, valves, and analytical tools made by Xylem (XYL) transport, analyze, and treat water in more than 150 countries.
There are many different water firms to investigate and a lot to understand about how the market operates.
However, if the variety of available water supplies overwhelms you, you shouldn't panic. That's why god created index funds.
S&P Global Water Index ETF from Invesco
The benefits of investing in a passive index fund, such as diversification at a very low cost, should be known to everyone.
One of the finest ETFs to invest in if you want exposure to firms involved in the water industry is the Invesco S&P Global Water Index ETF (NYSE: CGW). CGW is one of the least expensive on the market and follows the S&P Global Water Index with an expense ratio of only 0.62%.
The S&P Global Water Index itself monitors 50 international enterprises that are engaged in activities linked to water.
With a correlation of 0.95 or higher, the Invesco S&P Global Water Index ETF follows the S&P Global Water Index (1.00 would represent a perfect correlation).
Constituents of the Invesco S&P Global Water Index ETF
About 50 water equities have been chosen for the S&P Global Water Index (and, therefore, the Invesco S&P Global Water Index ETF) based on the relative relevance of the global water sector within the company's business strategy. The Index is made up of the following two clusters to provide a fair representation of various water industry segments:
Water supply, water utilities, wastewater treatment, building water, sewage, and pipelines, water purification, drilling water wells, and water testing are among the 25 water utilities and infrastructure enterprises.
Water treatment chemicals, water treatment appliances, pumps and pumping equipment, fluid power pumps and motors, plumbing equipment, plumbing pipes, fluid meters, and counting devices are just a few of the 25 firms that manufacture water equipment and materials.
The minimum total market capitalization and float-adjusted market capitalization must be at least $250 million and $100 million, respectively, to assure investability. Semi-annual rebalancing of the Index occurs. At each rebalance, no one stock may represent more than 10% of the Index.
Summary
Are you able to invest in the Invesco S&P Global Water Index ETF? I'm sorry, but only you can determine the answer to that.
The Invesco S&P Global Water Index ETF, however, can be an investment you want to make right now if you think that water and companies that deal with it will become more and more important in the future of our globe.
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