The 'Buy & Forget' Strategy of Coffee Can Investing

Investing Rs. 1 lakhs in Asian Paints in 1991 would have multiplied 863 times i.e., into Rs. 8.6 crores by 2021. Surprised right! Well, this is what coffee can investment does. So, in today's article, we will look at the idea of coffee can investing and why you should be using it?

The 'Buy & Forget' Strategy of Coffee Can Investing
"To do nothing at all is the most difficult thing in the world, the most difficult and the most intellectual."
~ Oscar Wilde

After reading the above quote, many intellectuals would have immediately thought of a counterargument. Valid also. However, it is hard to disregard Mr. Wilde's statement in the context of stock market investing. How come? Well, the answer is- after buying a stock, you should actually do nothing!

It is the 'buy and forget' strategy that has, time and again, proved to be rewarding comparatively higher returns to the investors.

Look at this 'real-life' example. If you would have purchased shares of Page Industries worth Rs. 5 Lakhs in January 2010. In January 2015, that Rs. 5,00,000 would have become Rs. 9,28,150!

This particular way of investing is called Coffee Can Investing.

Source: Bloomberg, Ambit Capital Research. 

Origin of the idea

The origin goes back to the Ancient West, where people would hide their valuables in used coffee cans and forget about them for a long time. You will be glad to know that it is not any modern revolutionary idea. It is something that our mothers have been doing for ages!

However, the idea was brought back by Robert G. Kirby in 1984 after one of his clients copied his stock advice for himself and his wife's portfolio. He would sell from her portfolio whenever Kirby would make any selling recommendation, leaving his portfolio undisturbed. Later, it was realized that the accumulated returns on the client portfolio far exceeded his wife's.

The idea has gained momentum in India with the book "Coffee Can Investing: The Low-Risk Road to Stupendous Wealth" by Saurabh Mukherjea (co-authored by Rakshit Ranjan & Pranab Uniyal).

What is the idea of Coffee Can Investing?

The two foremost questions that pop up while investing in the stock market are,

  1. How to pick the right stocks?
  2. For how long should you stay invested in that stock?

Both of these questions find their answers in the concept of coffee can investing. It means 'to invest in consistently high performing companies with consistent positive revenue growth for a period not less than ten years.'

This brings us to three main components of coffee can investing. These are:

  1. companies with ROCE above 15% every year (for last ten years),
  2. positive revenue growth over time (for ten years),
  3. holding the stock for at least ten years.
Source: elearnmarkets

Pros & Cons of Coffee Can Investing

There is no doubt that the idea seems more of a western concept which may or may not work in the Indian stock market.
Let us see what are the pros and cons of the idea, especially in the Indian context. And how successful this type of investment can be for you?

Pros:

“When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients.”
~ Warren Buffett
  1. Zero cost involved. Since you will be making your portfolio, there are zero management costs involved.
  2. Eliminating short-term shocks. In the short term, the market seems more volatile. It, in turn, causes a wave of panic among investors. However, this does not happen here.
  3. No rigorous monitoring. Since you have to hold it for a substantial period, you do not need to monitor the market continuously.

Cons:

  1. Consistently high performing companies are few. It is specifically true in the Indian scenario. If you look at historical data, there are very few companies that have consistently produced high returns.
  2. Holding a stock needs patience. The buzz, that is, made every time the market crashes can force people to sell besides their sound judgement.

How can you make a coffee can portfolio?

One unanimous opinion regarding the stock market is no matter how many companies you invest in, there will always be some companies that will not grow, some to go into losses, and the rest will give very high returns. So all you have to target is Pareto's principle. According to which 80% of your returns come from 20% of your investment.

Here are a few points that you can look at in a company while creating your portfolio:

  1. ROCE above 15% for the last ten years.
  2. Revenue growth to be more than 10% year-on-year.
  3. The company should have been at least ten years older.
  4. Market capitalization should be more than 100 cr.
  5. The company should have a moat that can sustain for the long term.
  6. Create a diversified portfolio (pick companies from different sectors).
  7. Very important! Invest in lump-sum. This way magic of compounding is best!

You can also take the help of the many available stock market platforms.
(Click here to check an online available coffee can portfolio).

Conclusion


In the current stock world, there is a dominant use of coffee can investing methods (or its different versions) because, for the long-term, it is a sound concept. However, since there are no brokers or intermediaries involved, the success of your portfolio substantially depends on your choice picking and holding period. Therefore, it is mandatory to carefully understand the stocks that have potential to outperform in the longer run.

“Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a fly epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”
~ Warren Buffett

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