The movie "The Big Short (2015)" ended with comment that Dr. Micheal Burry had closed his hedge fund and now invested his personal wealth in one resource: water. This got me interested and I tried to know more about his trades. One blogger claims that Burry has been buying up almond farms in California. Why? Well because growing almonds takes a ridiculous amount of water – 1 gallon per almond. Paradoxically, 80% of the world’s almond supply is grown in California, which just went through one of the worst droughts in the state’s history.
Interestingly, there's another hedge fund based out of New York has been buying up water rights across the country. Most of their investment theses rely on the unfortunate fact that there has been a perennial mismanagement of water in the American West. And that's why they are advocating to allowing people to buy and sell water rights -- they believe that this is a more expedient way to redistribute the West’s water; waste would be discouraged, water would shift to where it’s needed most, and farmers would be compensated.
The common theme in both these cases is the basically the same: rising demand and shrinking supply virtually guarantee that water’s value will increase. Anticipating that day, they're buying up as much as they can.
But I think that this is a very pessimistic view of the world and certainly doesn't lead to a win-win situation for all parties. They're betting that the world will face a water shortage, and they do not want to do anything about it, just make money on the downturn.
There is a better way to invest in this water crisis, one that does lead to a win-win for all stakeholders -- invest in companies like Ripple Foods, Patagonia, Baldwin, Nau and many others. For example, Ripple Foods produces 1 gallon of their pea-based milk using just 1/6th of the amount of water needed to produce a traditional dairy gallon of milk. Past returns are proof that ESG (environmental, social, governance) investing might be an active investment strategy that beats benchmarks. Like for example, the MSCI Emerging Markets ESG Index outperformed its parent index, the MSCI Emerging Markets Index, by a cumulative 12 percent on a total return US dollar basis—more than 50 percent of the outperformance was attributable to ESG factors alone.
I very confidently believe that us humans identify very well with incentives and when incentives are aligned with the greater good, amazing things can happen.
Notes:
- https://www.theatlantic.com/magazine/archive/2016/03/a-plan-to-save-the-american-west-from-drought/426846/
- http://ripplefoods.com/healthy-environment/
- https://www.cambridgeassociates.com/press-release/esg-factors-have-helped-investors-achieve-significant-outperformance-in-emerging-markets/
- http://myjeansdontlie.weebly.com/