Coffee Can Investing - The Right Way to Buy and Hold

14 Aug 2021  Read 3386 Views

Do you invest in stocks? Do you follow any specific strategy while investing, or do you just buy the shares of a company on a friend’s advice who told you that the prices of that company would go up? You are probably staying too far from reality!

Many intelligent people have lost money in the stock markets. Sir Issac Newton was one of them. He was undoubtedly the smartest inventor but don't misinterpret the word INVENTOR with INVESTOR. He invested in the South Sea Company, and even though he booked profits initially, he later suffered a huge loss. This impact was such that for the rest of his life, Newton forbade anyone from using the word “South Sea'' in his presence.

So, you see? Without a proper investment strategy, you might end up losing more money from the stock market than you have actually earned through it. As they say, “failing to plan is planning to fail.” Thus if there is success in the markets, the secret behind that is, naturally, the investment strategy.

One such intelligent investing strategy is the Coffee Can Investing strategy.

Sounds like a weird name for an investing strategy, doesn’t it? But there’s a whole story and a complete logic behind it. Let’s get into it.

History of Coffee Can Investing

In the late 1960s, Capital Group set up an entity known as the Capital Guardian Trust, which focussed on providing traditional investment counseling services to wealthy people. A man named Robert G. Kirby joined the company as the principal investment manager. In 1984, he wrote a note which introduced the world to the concept of “Coffee Can Portfolio”.

In the note, he talked about the portfolio of his client’s husband. The man had bought the shares as recommended by Kirby, but unlike Kirby, he did not sell any of the stocks from his portfolio. This process of not selling the shares and holding them for about ten years led to vast amounts of wealth creation. Kirby liked this idea of buying and forgetting the shares and termed it as 'Coffee Can Investing'.

Kirby used the word 'Coffee Can' because before banks came into existence, the Americans used to store their valuables inside a coffee can and kept them under their mattresses. If you were to extend the same logic to the stock markets, you could call it ‘Coffee Can Investing’.

Although it might look like a fluke, the main goal was that the investor sensibly creates his portfolio by picking his stocks and leaves it untouched for a long time. Kirby insisted that if an investor leaves the portfolio untouched, he will make way more money as compared to regular monitoring of those stocks. 

Indian version of Coffee Can Portfolio

Coffee Can proved to be the perfect strategy for long-term investors. Inspired by it, the analysts at Ambit (India’s premier providers of financial advice) decided to create their version of the Coffee Can Portfolio for Indian equity investors.

You would be thinking that this strategy has been used by Indian mothers for so long. You know that, right? How mothers keep their money in the kitchen jars for emergencies or any possible future use.

The Indian version is very simple and easy to understand. In the Indian version, we have to select 20 to 25 high-quality stocks and leave them untouched for almost a decade. One may think that selecting 25 stocks from 5000 is such a tiring and arduous process. But there are filters, which, when applied to the stocks, help in sorting them.

The first filter which is employed is that the market capitalization of the company should be at least 100 crores. And only 1500 listed companies fulfill this criterion. After that, look at the companies which have grown their sales by at least 10 percent every year throughout the last decade, along with generating a Return on Capital Employed of at least 15 percent.

You could run the above query and add a few more filters in Ticker Screener to come up with a list of a handful of companies -

Coffee Can portfolio avoids companies that borrow a lot of money to grow. It concentrates more on structural stocks rather than cyclical stocks and prefers companies with intangible strategic assets.

Results of Coffee Can Investing

When we look at the results, we see that the coffee can portfolios have generated better results as compared to other portfolios across all periods. Even during financial crises, it has performed admirably well. In fact, if invested for a decade with no churn, the returns generated are higher than the benchmark set.

Let's look at this table and see the difference it created against a very famous index, SENSEX.

Start Date

Stock Quantity

End Date

Coffee Can Portfolio (CAGR)

Sensex (CAGR)

Outperformance relative to Sensex 

July 2003

9

June 2013

27.4%

20.2%

7.2%

July 2004

10

June 2014

32.7%

19.7%

12.9%

July 2005

9

June 2015

22.2%

16.1%

6.0%

July 2006

10

June 2016

20.4%

11.4%

9.0%

July 2007

15

June 2017

19.7%

9.3%

10.3%

(Source: Coffee Can Investing book)

Not only this, but we can also say that the returns have been positive for more than three years and have been more than 9 percent per annum for all periods over five years with a probability of more than 95%, which is enormous!

Why does this portfolio perform so well, and how?

In ancient times, historians defined the greatness of a kingdom or the measure of an empire by its longevity. Great empires such as the Persian and Roman had long durability. When it comes to investing, greatness is defined almost similarly; it is defined as the ability of the companies to grow for long periods of time. This enables excellent companies to sustain financial power over long periods.

The Coffee Can Investing is an extension of the same concept. We know that great companies don't get disrupted by their competitors. Adding those in your portfolio and holding them for nearly a decade will always give you an upper hand.

Investing through the Coffee Can strategy has several advantages like:

  • Higher probability of profits for a longer period of time

  • Neutralizing the negatives in that period of time

  • Transaction costs will be negligible

  • The compounding  will have a significant advantage in the long run

Final words

We have seen that the Coffee Can portfolio is a smart and profitable strategy for investors who wish to get higher returns and have the requisite patience. It is expected to give you great returns when invested in great companies with no churns for over a decade. This portfolio also has the capability of performing in stress periods.

As Saurabh Mukherjea wrote in his book, “Some people want it to happen, some wish it would happen, others make it happen.” So, what are you waiting for?

About the Author: Harshit Kedia | 7 Post(s)

Harshit has pursued B.Tech. from IIT(ISM) Dhanbad. He has an avid interest in finance and enjoys reading articles, and studying various financial concepts. In his spare time, he loves playing basketball and listening to music.

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