Simple Liquid Lessons

by | Jul 14, 2016 | Archives

Here are some new thoughts on how to use simple logic and liquidity in making value investments.

A recent message at this site, “Brexit Boost”  looked at how economic opportunity is created by supply and demand.  This is easy and a logical thought.  A growing global population, if put to work in increasingly efficient ways, increases everyone’s wealth.

Another simple fact easy to understand is that this economic process of growth has to adapt to availability of natural resources.  Humanity has seen numerous power sources improve its productivity during the industrial revolution of the past several hundred years.  We passed though the Water Era, the Steam Era, the Internal Combustion Engine Era, the Turbine Era and the Electronic Era.

Each era required some special fuel, but one crucial part in every one of  these eras has been water.  It’s important, valuable stuff.  One place increased value is sure to flow into is water.

Yet which water shares will rise and which will drown and when?  Answering such questions takes time.  There are numerous obstacles in seeing the entire picture.  An easier way to invest in water shares is via indexing.

Based on this fact in October 2014, a message at this site looked at two water based ETFs that allow us to invest in water indices.

One ETF was the PowerShares Water Resources Portfolio (NYSE: PHO). This ETF started in September 2005 and invests in the Palisades Water Index.

In October 2014 PHO was priced at $23.56.  Less than two months later the share price had jumped to $26.43 and stayed in that range for nine months before plunging to below $20 per share.  The price then began to rise and recently has returned to the same price ($23.97) as when almost we reviewed it in October 2014.

finance.yahoo.com chart

finance.yahoo.com chart for PHO .

There are several lessons we can learn from this investment.  First, in the time frame of 18 months, there was profit potential for every type of investor.  Bulls picked up a quick 12.1% profit in less than two months, between October and November 2014.  Bears picked up a profit of 20.7% over 15 months when the share dropped to $18.89 in January 2016.

Long term investors have not seen any rise or fall in price. They still hold an investment in water and have picked up six dividends worth $2.43 or 10.1% or 5.88% per annum.

What type of investor are you?  I like the simple, easy, low cost, long term income producing approach.

Here is another bit of easy to use logic that spots value.  The price of the ETF PowerShares Global Water Portfolio (symbol) PIO.

Oct 2014, the price per share was $21.78.  By May 2015 it rose to $25.15 before sliding to $18.55.  Now the price is back to $21.56.

This ETF invests in global shares that are not denominated in US dollars.  Because the US dollar has been strong and rising versus other currencies, these shares should have underperformed the PHO shares.   This suggests that there is a hidden currency profit in PIO.  Plus PIO offers global diversification.

finance.yahoo.com chart

Finance.yahoo.com chart for PowerShares Global Water Portfolio ETF (NYSE: PIO)

Long term investing is like predicting tides.  We can know the long term direction.  The only things that can stop accurate prediction of tides are shifts in resources from events such as silting or dredging.

This is why investments in water make sense.  We know that populations are increasing.  Wealth is growing and more people want more water.  Yet like land, God is not making more.  Making better use of what we have grows in importance.

This is where the opportunity is, but unless you are an expert on water companies; the easy, simple way is to invest long term in water based ETFs.

Gary

We’ll review how and why I have invested in water at our August International Club retreat at our farm.

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