Coffee Can Investment Portfolio

August 31, 2020

'Coffee Can Investment Portfolio' sounds weird right? We usually come across names like equity portfolio; debt portfolio etc., but “coffee can”.. what's that?
The idea behind this name is actually quite unique.

It all began before the banking system was introduced to the world and people in Old West America used to collect all their valuable assets and store it in coffee cans (Coffee was a popular commodity in America in those times) and kept it under their bed for a Years altogether. Thus, the term coffee can was coined by money manager Robert Kirby in 1984.

You must be thinking how this story relates to investment portfolio.

Think about it this way, when an investor invests in stocks, they generally don’t tend to hold on those stocks for a long term. Few investors redeem their investments after gaining returns in the short term and the others panic looking at negative returns and leave the battlefield. But data suggests that if you invest in 10 high quality stocks (we’ll come to the selection process later) for a period of 10 years or more then the probability of the investment giving you a 15%+ CAGR rises to more than 90%. This is because even if you own 2 multi-baggers and the rest 8 turn to dust, the 2 stocks will alone give you your desired returns. 

Warren buffet once quoted,” if you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes”.

Coming to the selection process of the coffee can portfolio.. have you seen coffee advertisements, where they say, the best coffee beans are picked to make a perfect cup of coffee?. Similarly, to make a perfect coffee can portfolio, the right choice of stocks is important. A lot of research and reading has to go in to create such kind of portfolio. Having a limited number of stocks in the portfolio is a good way to go about it. A portfolio shouldn’t be flooded with many stocks all at once. This increases the risk of the portfolio not performing well even in the long run. Speaking of limited number of stocks, look at this example: a person goes to buy a car, he looks for the car which is best suited for him. He does all the required research before buying it. In the same way, it is important to read about the stock before buying. An investor should do all the required homework before jumping into investments. Knowing its past performance, company’s history etc. We are always careful when there is a limited buy.

When it comes selecting stocks here are 2 things you need to keep in mind: -

  • Select market leaders which have good past performance.
  • Diversification is the key.

Long-term investments require good risk appetite and patience. An investor must have the risk tolerance and time to invest to gain returns out of his portfolio. If an investor is looking to start investments to create such a portfolio when he is nearing retirement doesn’t make sense. The risk associated and time invested both are on the higher side. To give you an example of a popular personality Mr. Saurabh Mukherjea(CEO & Founder of Marcellus Investment Managers) runs a PMS by the name of Consistent Compounders which follows the philosophy of investing in stocks of companies which have achieved revenue growth in excess of 10 percent per annum and ROCE in excess of 15 percent per annum over a decade among other criteria. This narrows down their stock pick selection mandate from over 8000 stocks to a handful of 30-50.

To conclude:

  • To gain high returns on such portfolios, investors should have risk tolerance
  • It’s a long term investment. It requires patience. It is important to hold stocks for the long term.
  • Compounding does its magic in the long run.
  • Selection of right stocks plays a major role in creating such portfolio. An expert will be able to guide you better when it comes to selecting stocks and tenure of investment.

To be able to create your own magical portfolio, we suggest you read a top-selling book by one of our favourite Investment Managers- Mr. Saurabh Mukherjea which goes by the name of “Coffee Can Portfolio”

-Ridhi Sethia


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