I am back with my first post of 2023. In case you were wondering, no I didn’t abandon my stock investments on account of a disappointing 2022. If anything, I was buying more shares throughout last year as stocks went downhill. Here’s a recap of how my stocks performed in 2022.
One-year performance was, as expected, nothing to write home about. My stock holdings did far worse than the S&P 500 index and barely nudged past the NASDAQ index. If you go over my last year’s recap post (How my stocks did in 2021?), I wrote then that my stocks’ outperformance over the S&P 500 was due to my technology holdings. I also said that it was possible that the tide will turn in favor of non-technology stocks during the next five years. Well, one year doesn’t make a trend but clearly 2022 was not a good year for tech stocks. My one-year performance reflects the same reality.
Which of my stocks were the biggest laggards last year? This table lists the top-20 of those. They are ranked based on their corresponding $ impact on my portfolio.
Longer term performance: One year performance doesn’t mean much to me. I prefer to look at 3- and 5-year performances instead. How my stocks fared longer term: here are the two comparison charts.
As you can see, despite having gone through a poor 2022, my stocks have easily outperformed both the S&P 500 and the NASDAQ indexes over these multiyear periods. Even when not looking at them through the lens of relative performance, my stock holdings have done quite well in absolute terms over the past five years. 12.1% IRR (not including dividends) is historically pretty good considering that the period included two bear markets (2020 and 2022). For 5-year market return history, see this table from my September 2020 blog post.
The stock market has come down quite a bit since its December 2021 peak. My 5-year IRR back then was a whopping 27.9%. It dropped down to 12.1% in 2022. I consider it a reversion to the mean. 20%+ compounded annual growth rates are not sustainable for long periods of time. I am fine with last year’s drop. In the bigger scheme of things, drawdowns like these help cut speculative fever out of the stock market, which in turn help long-term oriented patient investors like me.
Which of my stocks did well during the last five years? See this table:
It is interesting to note that the majority of my top performance detractors of 2022 (first table above) are also my top 5-year performers. 14 out of 20. For instance, consider Tesla. My position in it dropped by 63% in 2022. But still Tesla recorded a whopping 54% compounded annual return in my portfolio over the last 5 years.
Only 6 of my 5-year performers aren’t on that first table. Those are Berkshire, Mastercard, Interactive Brokers, United Health, Jefferies, and Markel. This made sense because Financial and FinTech stocks did relatively well last year. Technology stocks did quite poorly.
Where we go from here? I am not sure how this year will turn out, but I lean towards an improving stock market scenario in the next 12 – 24 months. As I updated several times last year, I had been busy deploying my dry powder cash in 2022. Today, one month into the new year, the market has already recovered some. Today the S&P 500 index is off 14% from its peak. My dry powder buys are already in green by about 7%. I am looking forward to a better year but just in case I also have 50% of my dry powder cash waiting to be invested if the market drops down again.
Technology haves and have-nots: Several of my big stocks holdings are in the high-tech sector. Like Apple, Amazon, Tesla, and Meta. They tend to be more volatile stocks than others as this past year has made clear. However, it is important to distinguish high-tech businesses that are dominant and profitable from those that are aspiring to become dominant and not yet making much profit. All my technology holdings come from the first group. It is the second group comprising of speculative and not-yet-profitable companies that have fared far worse so far. Many of them may have been dealt a death blow. Businesses like Peloton, Stitch Fix, Carvana, etc.
Goldman Sachs has an index built of such non-profitable public technology sector companies. It’s called Goldman Sachs Non-Profitable Tech index. This index, as shown in below chart, has a huge upswing in 2020 and 2021 before it came crashing back to earth in 2022. Net result was less-than-zero five-year total return.
After rallying an absurd 420% from the COVID bottom in March 2020 to its high in February 2021, the Unprofitable Tech Company Index has lost nearly all of its gains and has now lost money over the past five years.
Ensemble Capital 4Q 2022 Investor Letter
None of the businesses I own are in that index. So yes some of my tech holdings had big drawdowns last year but none of them are about to roll over and die. Their business models are intact, and they remain profitable in this slowing economy. I expect them to continue growing their businesses over time and generate increasing profits. Share prices will eventually take care of themselves when the economy recovers.