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“The Big Short,” Adam McKay’s Oscar-nominated film about the financial crisis of 2008, is almost painful to watch, resurrecting the frustration toward banks and financial markets.
However, for Michael Burry, the character played by Christian Bale in the movie, the housing bubble and subsequent stock market crash meant a very large payday.
Betting on a Stock Market Crash
Burry, a doctor turned fund manager, became known as the first man to predict the subprime housing bubble. He profited from the crash by shorting the housing market through a financial instrument known as a credit default swap, in which the buyer benefits in the event of a default in the underlying loan portfolio.
Burry’s fund, Scion Capital, managed to record returns of 489.33% between November 2000 and June 2008. During the same time period, the S&P 500 had a 5.2% return.
Where Burry Invests Today
In a recent interview with New York magazine, Burry confessed that he still does not trust the way the financial system is being operated today. Weary of negative real interest rates and high levels of debt, Burry has turned to the one commodity he views as a safe investment: water.
As Burry states, “Fresh, clean water cannot be taken for granted. And it is not – water is political, and litigious.”
Burry goes on to say that transporting water is too expensive and impractical, and therefore, buying water rights wouldn’t be beneficial. Burry believes the best way to invest in water is through food – i.e., by growing food in water-rich environments and transporting it to water-poor regions.
But, there is certainly more than one way to invest in this necessary (and valuable) resource.
Investing in Water
The primary way to invest is water is through water utility stocks.
Because this is primarily a regulated industry, there are a handful of water utility stocks that trade in the public markets. But I like two in particular.
My top pick is American Water Works (NYSE: AWK), which benefits from its size. It operates in 45 different states. With its larger size, it is the company best positioned to acquire smaller operators.
American Water Works is outpacing the average industry growth rate. Its dividend yield is 2.2% and its price-earnings ratio is 23, positioning it as a great buy for investors seeking to follow Burry’s recommendation to invest in water.
American States Water (NYSE: AWR) operates through three services: water, electric and contracted services. The stock has a current yield of 2.1% and a P/E ratio of 25. Its public utility area includes California, where demand continues to increase with more frequent droughts in an agricultural region.
Another option to consider for a diversified water-related investment is a water ETF. I recommend the Guggenheim S&P Global Water Index ETF (NYSEArca: CGW). It is intended to be a balanced representation of different segments of the water industry. It invests in 25 water utilities and infrastructure companies and 25 water equipment and materials companies. The expense ratio is slightly below average at 0.65%
Among its largest holdings is my top stock recommendation for water exposure: American Water Works.
Water Isn’t as Plentiful as We Think
Many of us have heard the statistic that 70% of the earth is covered in water. But, it is also important to note that only 1% of that water is usable. Most water on the planet is either saltwater or locked away in glaciers.
Scarcity drives demand, which drives prices. As droughts continue to increase in severity, water will grow more and more valuable.
Michael Burry is known to be a risk-averse investor, only making investments when he predicts near-certain returns. While water won’t provide the same returns as shorting the subprime mortgage market, it should prove to be a relatively low-risk investment during a time of high market volatility.
How to Sleep Easy at Night
Is the economy keeping you up at night? Do you worry there’s another crash just around the corner? If so, you can stop worrying right now. All it takes is a few minutes.