What is Coffee Can Investing?

Are you also looking at the pile of your clothes and telling yourself you’ll do the laundry on the weekend?

You are also one of them, who procrastinates everything, from going grocery shopping to cleaning your room?

If yes, then I have a perfect investing strategy for you my friend! It’s for the lazy noobs like us that this strategy of Coffee Can Investing was born. So, Sourabh Mukherjee, through his book “ Coffee Can Investing ” has introduced us to this strategy.

Well, before we start with strategy, there is a very interesting story of how this strategy was developed. So, in 1960, there was a fund manager, Robert Kirby, he had a client whose husband bought shares of $5000 each on his recommendation but never sold those shares. After he died, they discovered that he had created enormous wealth. His investments were worth more than $8,00,000, due to his investments in Xerox. Kirby was quite impressed with his buy and forget strategy and named it Coffee Can Investing. The name was Coffee Can because back in the days, in native America people used to keep their valuables in coffee cans.

While the strategy sounds simple on the outside, its really difficult to follow it because its very very hard to not get affected by the volatility in the markets and hold stocks for more than 10 years, but it's time you be lazy with your investment approach as well my friend because this strategy has not just beaten the benchmark since 1990, but has also given 20 - 25% annualized returns.

Not just the returns are on a higher side, the process of shortlisting the stocks through coffee can strategy is also simple, you just need to apply two simple filters and you are set.

The first requirement of a coffee can portfolio is that the company should have a market capitalization of more than 100 crores, as you see there is not a lot of reliable information available on the companies that have a market cap less than 100 crore, there is a lot of information asymmetry with these companies.

Then we look for companies that have grown their sales each year in the past decade by more than 10% alongside generating a Return on Capital Employed ( Pre-tax ) of more than 15%.

Now, you may ask why these filters? 

Well, ROCE basically tells us how much returns a company is generating on the capital deployed ( Equity + Debt ), it basically reflects a company’s ability to generate returns on the capital and it reflects the capital allocation ability of the company. Also, he believes that the returns from a stock mimic the earnings growth in the long run.

 According to Mukherjee, they expect a return of more than 15%, because it is a bare minimum requirement to beat the cost of capital in India. Also, the risk premium should be 5% - 6%, as there are other risk free and moderately risky assets that have a return on capital of 7% - 8%.

Further, the strategy requires the company to have sales growth of more than 10% in the last decade, because Indian Nominal GDP has grown at 13% in the last 10 years and therefore a company that has a sales growth higher than the GDP growth is eligible to be in the criteria.

Why Coffee Can Portfolio outperforms the benchmark?

1. The volatility is less in the long term
2. In the long term the power of compounding plays its magic!
3. Holding a stock for a long term, and not churning the portfolio saves a ton of your brokerage fees.

While the Coffee Can strategy is simple, it is quite difficult to follow, because let’s accept it, volatility does affect our decisions while investing, but if you are willing to be patient then this strategy can generate multibagger returns for you. Create your own Coffee Can portfolio with 5 paisa.

Coffee Can Investing

Have you ever wondered how some investors seem to grow their wealth steadily over time without constantly fussing over their portfolios? Enter coffee can investing, a straightforward approach gaining popularity, especially in India. This strategy involves picking high-quality stocks and holding onto them for the long haul, much like storing valuables in a coffee can for safekeeping.

Principles of Coffee Can Investing

At its core, coffee can investing is built on a few simple yet powerful principles:

Quality Over Quantity
The first rule of coffee investing is to focus on high-quality companies. These businesses have vital track records, solid financials, and competitive industry advantages. For example, a company like Titan, known for its watches and jewellery, has shown consistent growth and profitability, making it a potential candidate for a coffee can portfolio.

Long-Term Perspective
Coffee can be invested in, but it is not about quick gains. It's about holding onto your chosen stocks for an extended period, typically five years or more. This long-term approach allows you to ride out short-term market fluctuations and potentially benefit from the power of compounding.

Minimal Trading
Once you've selected your stocks, you should leave them alone. This "buy and forget" approach minimizes transaction costs and helps you avoid the temptation to react to short-term market noise.

Diversification
While the number of stocks in a coffee can portfolio is typically small (usually 10-15), it's important to spread your investments across different sectors. This helps manage risk and capture growth opportunities across various industries.

Key Characteristics of Coffee Can Investing

Now that we've covered the basic principles let's look at what makes coffee can investing unique:

Simplicity
One of the most appealing aspects of coffee can investing is its simplicity. You don't need to constantly monitor the market or make frequent trades. Once you've done your initial research and selected your stocks, the strategy requires minimal ongoing management.

Focus on Fundamentals
Coffee can investing emphasizes a company's fundamental strengths rather than short-term price movements. Investors look for businesses with consistent profit growth, high return on capital employed (ROCE), and strong competitive positions.

Patience and Discipline
This strategy requires patience and the discipline to stick to your plan, even when the market is volatile. It's about trusting in the long-term potential of the companies you've chosen.

Potential for Significant Returns
While past performance doesn't guarantee future results, the coffee can approach has shown potential for generating substantial returns over time. For instance, a study by Ambit Capital found that a portfolio of Indian stocks selected using a coffee can criteria outperformed the broader market over 10 years.

Implementing Coffee Can Investing

If you're intrigued by the coffee can approach, here's how you might go about implementing it:

Research and Stock Selection

Start by identifying companies with a consistent track record of growth and profitability. Look for businesses that have:

● Maintained a Return on Capital Employed (ROCE) of 15% or higher for at least 10 years
● Shown steady revenue and profit growth
● A market capitalization of at least 100 crores (1 billion rupees)
● A strong competitive position in the industry

Build Your Portfolio
Once you've identified potential candidates, create a diversified portfolio of 10-15 stocks across different sectors. This might include companies from industries like IT services, consumer goods, healthcare, and finance.

Invest and Hold
Invest in your chosen stocks to hold them for at least 5-10 years. Resist the urge to make frequent changes to your portfolio based on short-term market movements.

Regular Review
While the core principle is to "buy and forget," it's still wise to review your portfolio periodically (perhaps annually) to ensure the companies continue to meet your criteria. However, this doesn't mean making frequent trades – only consider changes if there's a fundamental shift in a company's prospects.

Reinvest Dividends
If your chosen stocks pay dividends, consider reinvesting them. This can help harness the power of compounding over time.

Challenges and Considerations of Coffee Can Investing

While coffee can investing has its merits, it's important to be aware of potential challenges:

Difficulty in Stock Selection
Identifying the right stocks for a coffee can portfolio requires thorough research and analysis. It can be challenging for individual investors to find companies that meet all the criteria.

Lack of Flexibility
This strategy's "buy and hold" nature means you might miss out on opportunities to capitalize on short-term market movements or cut losses if a company's fundamentals deteriorate.

Concentration Risk
With a relatively small number of stocks, there's a risk that poor performance from one or two companies could significantly impact your overall returns.

Psychological Challenge
Holding onto stocks during market downturns or when other investment opportunities seem more attractive can be psychologically challenging.

Changing Market Dynamics
Even strong companies can face disruption in today's fast-paced business environment. The coffee approach requires confidence that your chosen companies can adapt and thrive over the long term.

Conclusion

Coffee can investing offers a simple yet potentially powerful long-term wealth-building approach. By focusing on high-quality companies and adopting a patient, disciplined approach, investors can benefit from compound growth while avoiding the stress of constant market monitoring.

However, like any investment strategy, it's not without its challenges. It requires careful stock selection, a long-term perspective, and the discipline to stick to your plan even when the market is turbulent.
Before adopting a coffee-can approach, it's important to consider your personal financial goals, risk tolerance, and investment horizon. While it can be an effective strategy for many, it may not suit everyone.