COFFEE CAN INVESTMENT APPROACH

'COFFEE CAN' approach for Investment

What is Coffee Can Investing approach?

Coffee can investing was first found by Robert.G.Kirby in a paper written by him in 1984. The strategy gets it's name because in the old times, people who invest in stock market would receive physical certificates of proof which they would put in coffee cans. They would hide in these coffee cans in their mattresses, latter forgetting about them. These stocks would eventually grow enormously making it's holders rich when he found it again. The coffee can investing depends entirely on the wisdom and foresight used to select stock in the portfolio.

What is required for a Coffee Can strategy ? 

To tap into these superior investment returns of coffee Can Investing would have to - 

• Carefully select the stocks based on performance of the company.
• Invest and forget about them for a long period of time. In coffee can investing to reap the maximum benefits, one would have to let the investment be for at least a period of 10 years.

How to Pick stocks under this approach?

There may be different opinions on this but I'm suggesting you the following filters as per the most accepted and best practices in the Industry- 

The stock considered must be filtered in the following manners - 

1. The Company selected must be Mid-Cap to large-Cap  : This is because we need a company that has established himself. Also we need records of the company for at least past 10 years to analyze and forecast the  growth prospects.
2. Revenue growth of the company must be 10% each Years for the last 10 years : This estimated percentage is reasonable, considering risk free returns and Inflation.
3. The ROCE of the company must be more than 15%  - The ROCE will show if the management is capable of allocating the shareholder's money effectively or not.

Results of Coffee Can Investing approach 

After selecting the stocks and forming a portfolio of those stocks, bring forward the concept of patience premium. As per patience premium , a period greater than 1 year would give you high probability of high return. Investors are not really rewarded much for period like 1 year or even up to 7 years. The chances of returns as per the research even reduced during the 3-4 years period. After 7 years and 10 years mark,, the patience premium is much higher.

The best case scenario occurs when patience combines with quality premium. Quality premium is the premium associated with the quality companies selected in the portfolio. A dream mix would be of good qualities companies selected as per coffee can portfolio filters and investors letting the investments be for a longer period.

With both premium combined the probability of losing money is -3% yealy. After a period of 10 years return would stand at 20 or more than that.

Why do returns Stagnant after 10 Years ?

In very simple words, Short term investments  returns will subject to market volatility, which could be the easiest way to lose our investments and results would vary too much to different investors.

However, when we look at longer period says 10 years if different investors create a coffee can portfolio the return would converge at 20% yearly.

Benefits of Coffee Can Investing

Minimum Expenses 

• Apart from the cost that occurs during the one-time investment, there would be no more transaction cost for the remaining 10 years.
• Tracking an index involves multiple alterations in our portfolio. Due to this investments are affected regularly from brokerages and other transaction expenses.
• No expense ration involves as in case of fund managed by a fund manager.

No Need to Track the Portfolio

• This is the one of the necessities of coffee can investing. Once we have filtered and achieved a portfolio of quality stocks the only thing that is required is for them to put aside and left alone for a decade.
• when we invest, unfortunately we always try and keep track of what is going on with the company, CEO changes, political factors and other economic factors would all stimulate us to act on our holding. In fact, a coffee can portfolio would even require us to not even look at our stock during pandemic.

Not Affected by the Volatility 

• The filters to create a suitable coffee can portfolio ensures that only the best stocks as per the present scenario must be in the portfolio.
• However, in short-run, these stock will face very high volatility in the market, political and economical changes in the market.
• in the long-run, the socks will only be judged by their intrinsic quality. However, if few stocks may turned out to be bad, it is safe to say that their were more than made up for by the stocks that performed better. In the long run, the portfolio will reduce the impact of market volatility. 

Outperform the market by 8-10 %

• According to research a portfolio that has followed all the steps will performing better than the market and beating it by 8 to 10 %

Why Don't Mutual Funds just follow coffee can Investing ?

If this approach enable you to outperform the market by such a large margin, then why shouldn't mutual fund just follow this approach?

1. One of the major reason is to wait for 10 years. In this approach you have to wait for a decade to have significant performance, very few investors would be willing to wait for such longer period.
2. Imagine a Scenario, where a fund does start coffee can investing. It would have to set-up a team that would prepare a portfolio for the investors. Coffee can will require you to forget the investments for the next decade. Setting up a fund only as Coffee Can will have a huge set up cost and the returns will get generating after a decade. In regular investment firm, employees are rewarded for the right decisions, investments & performance. These benefits would be available after 10 years approx. and it would be highly unfair to employees. 

SUMMARY 

•   5 Factors to consider while investing through coffee can approach- 

1. Stocks you are choosing must be of company that is a market leader in it's segment.
2. Company must have exceptional growth rates
3. One of the most important factors and rule to choose the stocks is the market capitalization must be of at least 100 crores.
4. Portfolio you are choosing for Coffee Can investing must be properly diversified means you should include FMCG, Automobiles, Infrastructure and IT sector stocks etc.
5. You should check the companies brand and competitiveness.

• In the Indian context, Coffee Can portfolio has been defined in the book "The Unusual Billionaires". This books refers to companies which have generated ROCE over 15% every year. Also, revenue growth of more than 10% every year, over the last year.

Thankyou All For The Patience!!!

Keep Learning.