What is coffee can investing?
Coffee Can Investing is an old concept of the West. Where people put valuable possessions in a coffee can and hide them. After many years when they open it, they usually end up with huge profits.
Coffee Can investing style can be replicated by buying the best company with a good track record & holding them for 10 or more years.
The back story of Coffee can Investing
Robert Kirby first saw his dramatic pattern when he was working for an investment counsel organization where a lady client approached them. She wanted to add her securities to the portfolio under their management. Which inherited after her husband died. Her husband, who was a lawyer, looked after her finances.
When Robert got the list he found the husband had been piggybacking on the advice he received from the advisors within the company. He applied the advice received from the advisor to his wife’s portfolio.
But the husband took the buy call & ignored the sell calls. He just bought $5000 of stock on each buy call and kept it in a safe-deposit box and forget it (It was the age of physical stock certificates).
Which resulted in many stocks in small-cap companies not even worth $2000.There were several holding worth $100000. However, there was one jumbo holding worth over $800,000 that exceeded the total value of his wife’s portfolio; Which was in a company called Haloid; this later turned out to be a zillion shares of Xerox.
Index Funds v/s Coffee Can Portfolio
Mr. Robert has described in his paper that Index Funds are Active Passive investments.
Active Passive Investment means they are not fully passive, there is a turnover in this fund & the turnover is based on human intervention (criteria to select stocks).
Index funds are good for people who believe that a stock portfolio cannot beat the market. But there are many investors who have proved it wrong over a long period of time.
Returns without transaction cost & taxes
If a person does not sell his position he does not need to pay transaction costs & taxes.
Transaction costs can wipe out a considerable amount of capital over time. Transaction costs are the cost incurred while buying & selling stocks. Coffee Can portfolio will eliminate this problem.
Portfolio managers have a problem with the approach as they need to perform better month-on-month & year-on-year. This restricts them to implement buy & hold strategy & save transactional costs.
Robert Kirby explains that fund managers are traders in the skin of investors.
Fund Managers in order to save their jobs & bonuses ignore the long term over the short term. Which causes them to incur huge transaction costs & taxes.
Approaching investing in coffee can be very difficult for them as they have to put in a lot of effort in the start and ripping benefits would take years. Also, convincing investors to stay invested for 10 years itself is a difficult task.
Saurabh Mukherjea coffee can portfolio
Mr. Saurabh is a very well known investment manager & author. He improved this portfolio including some filters in the process.
Coffee can investing portfolio Saurabh Mukherjee criteria.
The company should have a market cap of more than 500 cr.
Sales > 10% for past 10 years (each years)
ROCE > 15% for past 10 years (each years)
His filters are not explicit but it provides a list to research from.
The book ‘Coffee Can Investing: The low-risk road to stupendous wealth’ by Saurabh Mukherjea, Rakshit Ranjan, and Pranab Uniyal can be a great help to get clarity with the concept.
Advantages of Coffee Can portfolio
Investors do not need to track their portfolio once the initial hard work is done.
It minimalizes the expense cost. We do not need to pay the costs like management fees, transaction fees, the opportunity cost of tracking the portfolio, etc.
The volatility is ignored as you do not need to track the portfolio. The psychological biases stay one hand away.
Coffee can portfolio results
Saurabh Murkherjea has discussed in his book that a period greater than one year would give you a higher probability of higher returns. After a period of 7 years, the probability of good returns is much higher. This has been proved by a good amount of research.
Also, the coffee can portfolio prepared by using the above criteria has outperformed the market by a huge margin, which is provided in the book.
These higher returns also depend on the individual stock picks. Which requires a deep understanding of the companies & their prospects.
Coffee Can portfolio is good for investors who want to achieve a return more than Index Funds & ready to be invested for more than 10 years. It is a good alternative to other options who want to invest passively.
The book ‘Coffee Can Investing: The low-risk road to stupendous wealth‘ can be a great read to understand the concept.
Also Read: The Unusual Billionaires (book summary)
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