How to Build a Coffee Can Portfolio?
Have you heard about the “Coffee Can Portfolio”? Are you wondering what it is? Let us help you.
Coffee Can Portfolio is nothing but an investment strategy. Coffee Can Investing is a low-risk way to build enormous wealth by purchasing shares of outstanding companies and keeping them for 10 years without actively buying and selling them.
Let us understand coffee can investing by Saurabh Mukherjea in detail.
What is a “Coffee Can Portfolio”?
The “buy and forget” approach to investing in shares of companies that have consistently performed well is referred to as “Coffee Can Investing.” These companies aren’t monitored as regularly as others.
Such investment in shares creates a “Coffee Can Portfolio.” Those who invest in such shares build a diverse portfolio of consistently performing companies, buy their stocks, and hold them for at least 10 years.
Primarily, it is a long-term investing strategy with a time horizon of more than 10 years. At the end of 10 years, you will have some stocks that have not grown, others that have lost value, and two to four outperformers. Those outperformers will provide a high return on investment.
Where Did the Term “Coffee Can Portfolio” Come From?
Robert G. Kirby coined the term “Coffee Can Investing” in 1984. In Old West America, people used coffee cans to store all of their important things. Then, these cans were hidden beneath the mattress. The system was prevalent before the banking system was formed.
Similarly, with the Coffee Can Portfolio, investors choose high-performing equities, invest in them, and hold them for a lengthy period. People buy shares and forget them, much as they did in 1984 when they put items in a coffee can and forgot about them.
What Does It Mean in the Indian Context?
Coffee Can Investment was made popular by industry and literature. To be specific, Ambit Capital and a book on Coffee Can Portfolio, Saurabh Mukherjea’s “The Unusual Billionaires,” coauthored with Rakshit Rajan and Pranab Uniyal, introduced the term in the Indian context.
The book defines a Coffee Can Portfolio in the Indian context. It refers to companies that have generated a Return on Capital (ROCE) of over 15% every year with the Coffee Can Investing approach. This makes the approach a low-risk route to making stupendous wealth.
Fun fact: Indian mothers have been investing in the coffee can way for many years, storing money in grocery boxes and using it for later investments.
How to Build a Coffee Can Portfolio?
Many new things were learned during the pandemic—getting deeper into the world of investing in the stock market has to be somewhere at the top. It is not an easy subject since real money is involved. There are horrifying stories where people have lost all their life savings in the blink of an eye.
There are some advantages to long-term investing; they are compounding and fetch dividends. When a company releases a dividend, you will get some percentage over your holdings.
Coffee Can Portfolio is mostly concerned with stock quality. As an investor, you must choose a quality stock, which signifies a fundamentally strong company. Here are some points to build a Coffee Can Portfolio.
- The company should have been in existence for at least 10 years.
- The revenue growth should be at least 10% year on year, not CAGR or SAGR.
- ROCE of at least 15% for 10 years
- Market capitalization should be more than 100 crores
- The company should have good brand value.
- The company should have a competitive edge.
- Use a Coffee Can Portfolio screener.
For instance, let’s take an example of a toothpaste company. If a toothpaste company’s prices are increased, will people stop brushing? The answer is “NO.” Similarly, this strategy neither works on quantity nor growth; it works on quality investing.
By going through the “Marcellus Coffee Can Portfolio,” you can get an idea of how this works. Build a Coffee Can Portfolio screener and backtest the Coffee Can Portfolio stocks or Ambit Coffee Can Portfolio stocks before implementing the strategy with your own money.
You may also want to know How to Monitor Your Stock Portfolio?
How to Invest in a Coffee Can Portfolio?
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Invest in Lump Sum
Investing in a lump sum would benefit investors with large amounts of money. Do this once a year.
- Employees can do lump sum investments using their bonus amount.
- If you made huge profits through real estate sales or business profits, you could use that amount for lump sum investments.
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Systematic Investment Plan
A systematic investment plan (SIP) assists a paid person in investing a set amount each month.
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Buy on Dips
Purchasing an asset after it has dropped in price with the hope that it will rebound or exhibit an uptrend in the future is known as buying the dips. The method can be used to buy a new asset or to smooth out an existing portfolio.
A 4-step Framework while Building a “Coffee Can Portfolio”
- Choose companies that are market leaders.
- Build a portfolio of 10–15 companies and an intended churn of less than one stock per year.
- Choose companies that have an excellent growth track record of over a decade.
- Don’t focus on one type of stock; keep it diversified
Final Words
Coffee Can Portfolios are suitable for investors who wish to get a higher return than index funds and are willing to invest for over 10 years. For those who wish to invest passively, it is a viable alternative to other choices.
FAQs
Ques 1: Are there any scanners to build a Coffee Can Portfolio?
Ans: Yes, you can use the screener.
Ques 2: Which is better? Mutual funds or Coffee Can Investing?
Ans: It depends; if you cannot spend time on building and churning the portfolio, mutual funds may work for you.
Ques 3: Do I need to diversify my portfolio?
Ans: Yes, without diversification, the risk would be high.
Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.