2022 was a strong year for our strategy.
The strategy returned +1.6%, beating the -18.0% return of the MSCI World index ($SWDA.L) by 20 percentage points.
The first reason for the outperformance was that in 2022, our Value investing style came back into favour. The bubble in Growth stocks that had formed in 2020 and 2021 deflated, and Value stocks ($VTV) outperformed Growth stocks ($VUG) by 30 percentage points.
The strategy also managed to outperform the Value stock index $VTV by a few percentage points, through stock selection.
20 percentage points is an unusually large outperformance. We certainly do not expect the strategy to beat the market by such a wide margin every year, even though we do of course try and expect to beat the index in the long run. Most professional investors would be elated to outperform by 5 percentage points a year over a span of 10 or 20 years.
Of the 97 Elite and and Elite Pro Popular Investors tracked by @TradeBetter, our performance was the second best overall and the best of any investor focusing on stocks.
So it was a good year. But it is important as an investor to focus on the future. Sometimes, good past performance leads to poor future performance, as the stocks in a portfolio have appreciated and become expensive. That is what happened to many Growth investors this year.
Luckily, the stocks in our portfolio remain inexpensive. In an extreme positive scenario, in which the energy crisis in Europe abates, the war in Ukraine ends, inflation comes down, and central banks take their foots off the brake, our portfolio has 50% upside, assuming the banks in the portfolio return to their long-term average valuations.
Obviously, there are risks. If oil prices surge, inflation re-accelerates and central banks push the world economy into recession, our portfolio has significant downside. Banks tend to fall 50% in recessions.
In the face of uncertainty, we maintain our focus on the strong expected performance of Value stocks over the next 5-10 years. Given cheap starting valuations, we believe that over the next 5 years, our strategy has significant potential to outperform. We would not be surprised if the experience of 2000-2006 repeated, when Value stocks beat Growth stocks every year for seven years straight.
Investing in our strategy is not easy, as the strategy experiences large drawdowns from time to time. But we believe the potential long-term rewards for investors who are willing to stomach the volatility are significant. It feels as if Value stocks turned a corner in 2022 and that this decade will be very different from the last in terms of what and who outperforms.