The Coffee Can Portfolio, rooted in Robert Kirby’s 1980s articles, is an investment strategy emphasising simplicity and patience. It advocates for a buy-and-hold approach, selecting high-quality stocks and letting them grow over the long term. The name ‘Coffee Can’ symbolises the idea of stashing stocks away and allowing them to brew, challenging traditional active management. This strategy attracts those favouring a hands-off, less-interventionist approach to wealth accumulation. This article explores this further.
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Defining Coffee Can Portfolio
A coffee can portfolio may be defined as the approach of investing in the company shares that have consistently performed well in the past and keeping it untouched for a while. It may also be defined as the ’buy and forget’ approach. This special portfolio includes companies that aren’t monitored as regularly as others.
- Investors investing in coffee can portfolio build a diverse portfolio of consistently performing companies and make sure that they hold the shares of these performing companies for at least ten years.
- It may also be termed as a long-term investing plan where you hold the stocks for ten years and at the end of ten years there are chances that you will have a few stocks which completely underperformed and a few which outperformed making the whole process worth it.
- At times these outperformers provide you return on the whole investment.
Origins of the Coffee Can Portfolio
The coffee can portfolio’s roots can be traced back to the 1980s, more specifically 1984, when investment manager Robert G. Kirby introduced the concept through a series of articles. Kirby sought to challenge the prevailing wisdom of active portfolio management, advocating for a simpler, more patient approach to investing. The term ‘coffee can’ itself evokes the idea of placing chosen stocks in a can and leaving them untouched over the long term.
Before the modern banking system found its way into the lives of every common man, people of Old West America would put all of their valuables in a coffee can, hide it under the mattress, and forget about it for a very long time. Similarly, with the coffee can portfolio, investors choose high-performing equities, invest in them, and hold them for a lengthy period.
Significance of Coffee Can Portfolio in India
Coffee can investment was made popular in India by a book by Saurabh Mukherjea, The Unusual Billionaires, coauthored with Rakshit Rajan and Pranab Uniyal.
The book defines a coffee can portfolio in the Indian context. It refers to companies that have generated a return on capital (ROCE) of over 15% every year with the coffee can investing approach. This makes the approach a low-risk route to making stupendous wealth.
Building a Coffee Can Portfolio
Long term investing has always been an advantage, and is always a recommended portfolio but on the flip side there are horrifying stories where people have lost all their life savings in the process, let’s face it, it has real money involved.
With a few basics, one can enjoy the benefits of being a part of this process. As an investor, you must choose a quality stock, which signifies a fundamentally strong company. Here are some points to build a coffee can portfolio:
- The company should be in existence for at least ten years
- Invest in the company with a minimum revenue growth of 10% year on year
- ROCE of at least 15% for ten years
- Market capitalisation should be more than 100 crores
- Always invest in good brand value company
- The company should have a competitive edge
4-Step Framework to Build a Coffee Can Portfolio
- Look for companies with a proven track record of dominance, as these tend to have established competitive advantages, robust management, and a history of navigating market challenges successfully. Identifying market leaders provides a strong foundation for building a resilient portfolio.
- Concentrate your investments on a carefully curated list of 10 to 15 companies. This deliberate approach ensures that each company holds significant weight in the portfolio, allowing investors to closely monitor and track the performance of each holding.
- Evaluate the historical growth track record of each chosen company. Look for consistent revenue and earnings growth over the years. A company with a proven ability to navigate economic cycles and deliver sustained growth is likely to be a valuable addition.
- While focusing on market leaders, it’s essential to maintain diversification within the portfolio. Avoid over-concentration in a specific sector or type of stock to mitigate risks associated with industry-specific challenges.
Advantages of Coffee Can Portfolio
- Riding the Wave of Turbulent Markets: A key advantage lies in its ability to navigate through turbulent markets. By adopting a buy-and-hold strategy, investors can resist the temptation to react to short-term market fluctuations, allowing them to ride out volatility and potentially benefit from the eventual recovery of their chosen stocks.
- Compounding Magic Over the Long Term: One of the standout features of the is its reliance on the magic of compounding. By holding onto high-quality stocks over an extended period, investors unlock the power of compounding, where gains accumulate and multiply exponentially.
- Quality Stocks for Long-Term Returns: The strategy’s emphasis on investing in great quality stocks is another advantage. By carefully selecting fundamentally strong companies, investors position themselves for sustained growth and resilience. This approach contrasts with short-term speculation, aligning with the notion that a portfolio comprising high-quality stocks can deliver robust returns over the course of a long-term investment journey.
Conclusion
Coffee can portfolio presents a unique and patient investment approach, challenging conventional active management. This strategy holds significance globally and particularly in India, providing an alternative in the face of market volatility. Its appeal lies in offering a steady, less hands-on approach to wealth creation, making it attractive to investors seeking resilience in the dynamic financial landscape.
