Water Rights

Water Rights are the legal entitlements that allow an owner to use water from a specific source, such as a river, stream, or underground aquifer. Think of it not as owning the water itself, but owning the right to use it. This might sound a bit abstract, but in an increasingly thirsty world, these rights are a tangible and incredibly valuable asset. As populations grow, industries expand, and climate patterns shift, the reliable supply of fresh water is becoming one of the most critical economic challenges of our time. For a savvy value investor, this creates a compelling opportunity. Water rights can be bought, sold, and leased, much like physical property. They represent a claim on a resource that is absolutely essential for life and commerce, making them a unique asset class with a powerful, built-in moat. Unlike tech trends that come and go, the demand for water is permanent.

Warren Buffett famously said, “Be fearful when others are greedy and greedy when others are fearful.” While the world worries about water scarcity, shrewd investors see the underlying value. Water has been dubbed “blue gold” for a reason—it's an indispensable commodity with no substitutes. Investors like Michael Burry, famous from “The Big Short,” have turned their attention to water, recognizing that its demand is completely inelastic. You can postpone buying a new car, but you can't postpone being thirsty. For value investors, water rights and related assets check several important boxes:

• Durable Competitive Advantage: Access to a secure water supply is a profound competitive advantage for any farm or industrial operation. The rights themselves are often limited in number and protected by law, creating high barriers to entry.
• Tangible Asset: Unlike a complex derivative, a water right is a claim on a real, physical resource.
• Favorable Supply/Demand Dynamics: The global supply of accessible freshwater is finite and, in many places, shrinking. Meanwhile, demand from a growing population and water-intensive industries (like semiconductor manufacturing and agriculture) is constantly rising. This is a classic recipe for price appreciation over the long term.

Understanding water rights is tricky because the rules change dramatically depending on where you are. In the United States, the legal systems are largely split between the wetter East and the arid West.

Common in the eastern states, the Riparian system grants water rights to landowners whose property physically touches a river or stream. The principle is one of reasonable use; you can use the water for domestic purposes or farming, but you can't divert large amounts of it or sell it in a way that harms your neighbors downstream. These rights are tied to the land and are generally not sold separately, making them less of a standalone investment vehicle.

This is where it gets interesting for investors. Dominant in the western states, this system is governed by the mantra: “First in time, first in right.” The first person to claim the water and put it to “beneficial use” (like farming or mining) gets the primary right, known as a senior right. Those who came later hold junior rights. When a drought hits, senior rights holders get their full water allocation before junior rights holders get a single drop. Crucially, these rights are not tied to the land. They are a separate asset that can be bought, sold, or leased, creating a market for water.

For the ordinary investor, buying a senior water right on the Colorado River is likely out of reach. However, there are several practical ways to invest in the “blue gold” theme.

This path is typically for large institutions, hedge funds, or sophisticated agricultural players. It involves buying the rights directly or purchasing land with valuable senior water rights attached. The market is opaque and illiquid, requiring specialized legal and hydrological expertise.

This is the most accessible route for most people. You can invest in the public companies that form the backbone of the water economy.

• Water Utilities: These are the companies that treat and deliver water to our taps. They operate like a classic utility—stable, regulated, and often paying dividends. Think of giants like American Water Works (AWK) in the U.S. or Veolia (VIE) in Europe.
• Infrastructure & Technology: This category includes the “picks and shovels” of the water industry. These are companies that build pipelines, pumps, and filtration systems, or develop cutting-edge desalination and purification technology. Examples include Xylem (XYL) and Pentair (PNR).
• Agricultural Powerhouses: Some large agricultural corporations are massive landowners with invaluable senior water rights. Investing in them can be an indirect but powerful play on water.

For instant diversification, you can buy a water-focused ETF. These funds hold a basket of companies from across the water industry, spreading your risk. A well-known example is the Invesco Water Resources ETF (PHO), which invests in companies that conserve and purify water for homes, businesses, and industries.

Investing in water isn't a risk-free stream of profits. It's a politically and environmentally sensitive area.

• Regulatory Risk: Water is a public good, and politicians are always under pressure to regulate it. A change in law could devalue privately held rights overnight. The “public trust doctrine” can be invoked by governments to re-allocate water for environmental or public needs.
• Hydrological Risk: You can own the best senior water right in the state, but if a historic drought dries up the river, your right is worthless. Climate change makes historical water flow data less reliable for predicting future availability.
• Social and Ethical Concerns: There is a robust public debate about the morality of profiting from a resource essential for life. This can lead to public backlash and reputational risk.