Apparently, he reached the conclusion that water was the "stuff" of the world because he noticed that everything sustains itself from moisture.

Here are some quotes from the Cohen about Thales:

• "Thales reportedly said that the basic stuff was water: this could mean that everything comes from water as the originating source, or that everything really is water in one for or another"

• "Thales also said that the Earth rests or floats on water ... Thales thought that soul produces motion and that a magnetic lodestone has soul because it causes iron to move"

• "Thales seems to have thought that everything is from water (although it is not clear whether he thought that water is the origin of all things, or that everything really is water in some form or another)"

• "He may have gotten this idea from seeing that the nourishment of all things is moist, and that even the hot itself comes to be from this"

(I'm adding this quote just because it's funny)

• "They say that once when Thales was gazing upwards while doing astronomy, he fell into a well, and that a witty and charming Thracian serving-girl made fun of him for being eager to know the things in the heavens but failing to notice what was just behind him and right by his feet"