Coffee can investing is known for selecting a company and investing in it for a long term, Its more of a “Buy & forget” strategy rather than calling it as a “Buy & Hold”. Do you know how the coffee can investing started ? what is the selection criteria to form a coffee can investing portfolio? In this article , we are going to uncover those details in this blog post.
Introduction of coffee can investing
In the 1950s, Robert G Kirby an employee of a large investment advisory firm received a call from the wife of a deceased lawyer who was a client of his advisory firm.
The lawyer who handled family investment passed away and his wife inherited the investments. Kirby had been working with this client for 10 years – during which he managed her investment portfolio, jumping in and out of stocks – when her husband passed away suddenly. The client wanted Kirby to handle the stocks she had inherited from her deceased husband. Here’s what happened next
Now Kirby starts to analyze the investment portfolio of lawyers and realized something strange. The husband had mimicked the equity recommendations given by Kirby’s company for his wife’s portfolio. but there was a subtle difference.
The husband buys $5,000 worth of stock in both his and his wife’s portfolio , would stores his own share certificates in a safe. whenever Kirby made a sell recommendation, the lawyer would only sell from his wife’s portfolio, but hold the shares in his portfolio.
At the end of many years, returns from the husband’s portfolio far exceeded his wife’s. His portfolio looks odd too. He owned several small emerging companies with values of less than $2,000. he had several large holdings with values of more than $100,000. there was one jumbo holding worth over $800,000 that exceeded the total value of his wife’s portfolio and came from a small commitment in a company called Haloid; this later turned out to be a million shares of Xerox,” Kirby later wrote.
It also revealed that Buy and patiently holding the shares of a great companies for the long term generated far superior returns as compared to active buying and selling. This insight provides Kirby to form the portfolio on basis of the Coffee can investing strategy.
The term coffee can investing strategy roots from America’s old west when people put their valuables in a coffee can and store it under the mattress. This practice involved no transaction charges, no maintenance charges, etc. The success of this strategy is purely based on wisdom and foresight to select the objects to be placed in coffee can, to begin with.
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Kirby didn’t put his solution into action. Why? There is a massive career risk for him. Kirby wrote” who is going to buy a product, the value of which will take 10 years or a decade to evaluate. That’s a very long time! This holds a big risk for professional investors.
Who can use this investment principle then?
An individual investor can use this principle and benefit from it.
Because individual investors have an edge over professional investors because there is no career risk for them. He is not bound by rules where a professional fun managers adhere to. This means that individual investors can use the best idea they have.
Two factors determine the success of this coffee can investing strategy.
Patience :- It requires immense patience to taste success in this strategy. Ten years is not a short time.
When you are investing in a stock (not speculating) you have become a part of business. It takes time for business to grow and prove it. Imagine you are putting yourself to get a college degree, you won’t get the degree in first day, first semester, (compare to Quarterly results). It would take good three years to complete and become a graduate.
I personally follow this rule in investing, I give three years of time for a stock ( despite of mediocre results). In most cases, the results have been great and satisfactory after a three years of time.
Coffee can investing instill patience in an investor which is the most sought after quality in the world of investing. Also various research study states, frequent trading generates poor results. I believe taking coffee can investing route is a great escape from trading.
Quality :- The quality of a company/ enterprise you choose to invest in plays an important role in success.
In coffee can investing, you are forced to select stocks not more than 20 securities. This criteria forces you to think and makes to choose your stocks with careful attention. This kind of attention keeps you away from penny stocks, cyclical companies, loss making firms. Naturally , you form a portfolio of proven quality stocks / market leaders in market which can keep up the superior returns for longer tenure.
Superior results were achieved by selecting great companies and holding on to it for a very long time. That’s the foundation of forming a coffee can portfolio.
Criteria to coffee can investing portfolio:
- The company should have an existence of more than 10 years.
- The revenue growth should be 10 % year on year, not CAGR.
- Market capitalization above 500 crores/ million (USD).
- ROCE of 15 % at least for 10 years.
- The company should have a business moat.
Everything has its own pros and cons. Coffee can investing is not an exception.
- Long-term approach: Investing in equity for a long time period generates handsome returns & avoids the chances of negative returns.
- No transaction cost: Buy holding a share for a long time helps you avoid transactional & brokerage fees.
- No panic of Volatility: short-term volatility or dips in quarterly results doesn’t bother you. So, you allow the magic of compounding works on your investment.
- Wrong selection: If the stocks are not researched properly and chosen, it leads to huge wealth destruction.
- Missing on New trends: New companies may replace good old companies can affect the performance of your portfolio.
It is very important to choose the securities which can withstand a 10 year time period without much changes in fundamentals when you are investing through coffee can investment.
Eg: copra (dry coconut) price doubled in the last few years, it doesn’t go to stop me from using coconut hair oil & eating coconut-based chocolates.
Will I still shave my beard after 15 years? Probably yes, unless I end up in an island!
All the professional investors have a great research team, the latest technology, etc. But as an individual investor if you have the conviction to hold a share 10 years & good knack of stock selection nothing can stop you from creating a stupendous wealth.
Let me know your thoughts and comments below. Thank you for reading. Happy investing!