The wave runner

We’ve talked a lot here about playing the long game. About not getting caught up in the current wave. But we also have to acknowledge that waves happen. And a smart investor takes advantage of long-term opportunities created by short-term waves.

We’re playing a different game than the pros. The pros are paid to predict the future three to six months out. Individual investors can ignore that and try to find companies battle-tested enough to weather whatever storms come their way and win out over time.

I’ve mentioned a few times that I haven’t done a lot of buying this year, but the buying I have done has been centered largely in two areas: Financial services and REITs. I think anyone awake this year knows the reasons. Rising interest rates made life very difficult for both sectors and caused a lot of near-term pain. Repeating what was just said above, the pros are required as part of their jobs to focus on that near-term pain, and what is coming in the next three to six months because of the changing cycle. We’re free to look past it.

For banks, there was also the small matter of a banking crisis last spring that caused industry-wide panic but always seemed rather limited to a few poor players.

I’m happy to say that in the near term, at least, the optimism has been rewarded. Among the stocks I bought or added to in the spring and summer, Live Oak Bancshares, Ally Financial, and TFS Financial, just to name a few, are all up big from their lows. Other interest rate sensitive companies like Walker & Dunlop have also recovered. Live Oak in particular jumps off the screen, a double from where it was in May.

This isn’t meant to be a victory lap. Things could still go wrong from here. (And back to original premise of “get rich slowly” I have no intention to sell any of these names. I have no clue whether you should buy them now, or sell them, or even acknowledge their existence.) But it is a pretty remarkable example of why it is good to remain calm when others are panicked, and the value in separating the good from the bad.

But as importantly, I write today to note the wave might have now passed. The biggest REIT index and a closely-watched regional bank index (represented here by ETFs tracking those indexes) have, as of Dec. 15, just about completed a round trip and are back to even for the year.

I don’t tend to put much weight into those lines in terms of making buying decisions from here, though I will say that I think that many of the things that looked like clear bargains earlier in the year are mostly gone. There are a few that have not recovered the way I thought they would that are still intriguing to my eyes, but it does appear the thrill is largely gone.

I wasn’t calling a bottom before, and I am certainly not calling a top here at breakeven. I like a lot of these companies because of their long-term growth potential, not because of their near-term bounce back potential. I’m still not convinced the Fed will reverse course as rapidly as the market seems convinced it will. And I still see the potential for tougher times up ahead.

But this year, for me, has been a smorgasbord of confirmation bias about the existence of waves, and the benefits of looking past them. Whatever becomes of these sectors from here, know there will be other opportunities right around the corner.

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