What is Coffee Can Investing?
What is Coffee Can Investing?
Coffee Can Investing simply means a ‘buy and forget’ strategy. In the short-term stock market is uncertain and volatile but as the time frame in the stock market increases, it becomes less volatile and easier to predict. This is the feature of the stock market which Coffee Can Investing strategy takes leverage of and invests in the stock market for the long-term.
How Coffee Can Investing Strategy Emerged?
Most people don’t analyze much before buying a share and keep tracking the performance of the shares on a daily basis which long-term shareholders should not do. The term Coffee Can Investing was coined by a fund manager named Robert Kirby in 1984 when one of his client’s husband bought shares worth $5,000 on his recommendation but forgot to sell them.
When his client’s husband died, Robert realized that the investment of $5,000 is now more than $8,00,000 mainly because of the investment in the company XEROX. Robert Kirby was impressed by this strategy and named this strategy Coffee Can Investing. Robert Kirby’s idea of naming it Coffee Can rolls back to Old West America when people would put all their valuable possessions in a coffee can and not really touch them for a long time before the ever-present banking system was established.
Understand what is a coffee can investing and how you can create a coffee can investing portfolio with this video:
How Coffee Can Investing Became Famous in India?
In India, the term Coffee Can Investing was popularized by Saurabh Mukherjee. Back in 2018, when Saurabh Mukherjee was the CEO of Ambit Capital, his team began to embark on a research project to study how well the Coffee Can approach affect investors in India.
His team found out that this method delivered exceptional results and found that the Coffee Can portfolio not only goes on to beat the Sensex but also performs well when the market goes down.
In order to study the Coffee Can portfolio, Saurabh’s team used some very simple filters to identify a handful of stocks to make up an entire portfolio. The share market is a collection of close to 7,000 companies while on average there are only 12 companies in a Coffee Can portfolio, which means that although these filters are quite simple yet they have a high bar for companies to strive for.
The coffee can Investing strategy is best suitable for Government employees as you know government employees can invest in stock market .
How to Create a portfolio using Coffee Can Investing Strategy?
Coffee Can Portfolio primarily focuses to select good stock for the long term. As an investor, we should invest only in fundamentally strong companies or monopoly stocks in their respective industries for which you can keep the following points in mind:
1). Select companies whose market cap is greater than 100 crores
In your Coffee Can portfolio, you only pick those companies whose market capitalization is more than 100 crores. Know the Top 10 companies in India by Market Capitalization. There is not much quality information present in the market regarding companies with a market cap of less than 100 crores and there is a high chance that these companies may present misleading information regarding their financials.
2). Check whether a company has generated a ROCE of 15% or more in the last 10 years
Return on Capital Employed (ROCE) is a financial ratio that can be used in assessing a company’s profitability and capital efficiency. It helps us in assessing how well a company is generating profits from the capital it invests in the company. The higher the ROCE, the better the company is at deploying its capital.
A minimum ROCE of 15% is selected because it’s the minimum profit a company should earn to beat the cost of capital. A golden rule is that a company needs to invest in projects that generate more returns than the cost of capital.
3). Revenue of the company should be at least 10% on a year-to-year basis
Between 2007-2017, India’s nominal GDP growth averaged 13.8%. Nominal GDP is the rate at which the GDP of a country grows without considering inflation. A good company with a strong brand value and the mass appeal must be able to generate at least a similar growth of 10% over a 10-year period.
Keeping these figures in mind, the team set up portfolios going back to year 1991 and the results clearly showed that such a collection of companies beat the Sensex across all time periods. Even the 2008 financial crisis did not stop the Coffee Can portfolio to beat the market.
Saurabh Mukherjee and his research team in Ambit Capital analyzed various companies between the year 1991 – 2000 using the Coffee Can filters and then from the year 2000 created Coffee Can portfolios every year by adding or subtracting companies based on the above filters. He noticed that over the course of 15 years from the year 2000, the Coffee Can Portfolios beat the Sensex consistently.
What makes the Coffee Can Portfolio effective?
1). Less Volatility
One of the major reasons for losses in the share market is market volatility but in the Coffee Can Investing strategy you stay invested in the market for longer periods of time which brings down the impact of market volatility and lets the magic of compounding play its part.
Consistency- Companies in the CCE portfolio have a consistent track record to generate 10% growth and 15% ROCE over the past 10 years. In the long run maintaining these growth rates becomes a massive challenge.
Here, the management plays an important role as if a company is successful in achieving these targets it signifies that the management is good at allocating money for projects and takes every decision which ensures value is created for the shareholders which makes the Coffee Can companies boringly consistent.
If a company is able to grow its revenue year after year for a whole decade, then there is something truly unique about it. Businesses in the Coffee Can portfolio are dominant respective industry and therefore enjoy a large chunk of market share.
3). Winner Companies
In a Coffee Can portfolio, winners will always cancel out the losers. Even though some companies in your portfolio may incur losses over time or some generate only market returns but the which are profitable will make up for the losses and even outperform them significantly.
To Sum Up
On paper, the Coffee Can Investment strategy looks like a simple one but practically it is difficult to execute because short-term volatility tests our patience and character. It requires immense patience and determination to not get carried away by market conditions as the human mind is prone to several illusions and biases which make us sabotage our own financial freedom.
So those who have trust in their processes and don’t get swayed by short-term gains and losses are able to earn good profits in the long term by the Coffee Can strategy.