What is coffee can investing?
Coffee can investing is a term that has gained popularity in recent years, especially in India. It is an investment strategy that involves selecting high-quality stocks and holding them for a long time. The strategy derives its name from the practice of keeping valuables in a coffee can and forgetting about them for a long time. The idea is that the assets will appreciate and become worth much more than their initial cost over time. This blog will explore coffee can investing, how it works, and the benefits of using this strategy for your portfolio.
What is the coffee can investing strategy?
Coffee can investment strategy involves buying and holding a portfolio of high-quality stocks for long-term, usually five years or more. The strategy is based on the premise that investing in the right companies will result in significant capital appreciation over time. The concept was popularized in India by Saurabh Mukherjea in his book “Coffee Can Investing: The Low-Risk Route to Stupendous Wealth.”
The strategy of coffee can investing is straightforward. Investors pick a group of high-quality companies with a proven track record of generating consistent profits and revenue growth. The chosen stocks are held for an extended period, irrespective of market conditions or short-term fluctuations. This strategy allows investors to avoid the temptation of selling their holdings during short-term market volatility, which can lead to missed opportunities for long-term gains.
How does the strategy get its name?
The name ‘Coffee Can Investing’ has an interesting backstory. The term was coined by Robert Kirby, a portfolio manager at Capital Group, a prominent investment management firm. Kirby narrates a story where he met a woman who inherited some money and wanted to invest it in the stock market. She had heard Capital Group was a good place to invest and contacted Kirby for advice. Kirby suggested a few high-quality stocks that he believed would do well in the long run, and the woman agreed to invest.
A few years later, Kirby met the woman again and asked her how her investments were doing. The woman replied that she had put the stock certificates in a coffee can and stored them away. Kirby was surprised and asked her why she hadn’t sold any stocks. The woman replied that she didn’t want to interfere with the stocks and let them grow over time. Kirby was impressed with her approach and started referring to this investment strategy as ‘Coffee Can Investing.
How does coffee can investing work?
The idea behind coffee can investing is to invest in high-quality stocks and hold them for an extended period. When selecting stocks for your coffee can portfolio, look for companies with a solid competitive advantage, a sustainable business model, and a proven track record of generating consistent profits and revenue growth.
It is also essential to diversify your portfolio across different sectors and industries. This approach helps to minimize risk by spreading your investment across different sectors and reducing the impact of sector-specific risks. Diversification also helps to capture market opportunities across various industries and sectors
Once you have selected your stocks, the next step is to hold them for an extended period. This is a crucial aspect of the coffee can investing strategy. By holding your stocks for an extended period, you can avoid the temptation to sell during short-term market volatility, leading to missed opportunities for long-term gains.
What is a coffee can portfolio?
A coffee can portfolio typically consists of 10-15 stocks from different sectors and industries. These stocks should be high-quality companies with a track record of consistent growth and profitability. Here are some popular examples of stocks for coffee can investing:
1. Amazon (AMZN)
2. Apple (AAPL)
3. Microsoft (MSFT)
4. Alphabet (GOOGL)
5. Johnson & Johnson (JNJ)
6. Procter & Gamble (PG)
7. Visa (V)
8. Mastercard (MA)
9. Berkshire Hathaway (BRK.A)
10. JPMorgan Chase (JPM)
These stocks represent some of the biggest companies in the world, have a competitive edge over the others, and they have all shown consistent growth and profitability over the years, and have a ROCE>15% for 10 years.
What are the benefits of coffee can investing?
There are several benefits to using a coffee can investing strategy for your portfolio:
- Long-term gains: The primary advantage of coffee can investing is the potential for significant long-term gains. By holding high-quality stocks for an extended period, investors can capture the full potential of their investments and benefit from the compounding effect of reinvested dividends.
- Reduced Risk: Another benefit of coffee can investing is the reduced risk of short-term market volatility. By holding stocks for an extended period, investors can avoid the temptation to sell during short-term market fluctuations, which can lead to missed opportunities for long-term gains.
- Simple Strategy: The coffee can investing strategy is simple and easy to understand. Investors can pick a group of high-quality stocks, hold them for an extended period, and benefit from long-term gains without the need for constant monitoring or adjustments.
- Diversification: Diversification is crucial, by investing across different sectors and industries, investors can spread their risk and minimise the impact of sector-specific risks
- Low cost: Coffee can investing is a low-cost strategy that requires minimal trading and management fees. This approach helps to maximise returns by reducing investment costs and expenses.
What are the cons of coffee can investing?
- Lack of flexibility: Coffee can investing is a passive investment strategy that does not allow for much flexibility. Once you have selected your portfolio of high-quality stocks, you can’t make changes.
- Identifying new stocks: It is difficult to identify the right stocks to include in one’s portfolio and requires detailed analysis and expertise which is hard to find.
- Timing Risk: Investors may miss out on short-term gains by holding stocks for years without selling them.
How to build a coffee can portfolio?
Building a coffee can portfolio involves selecting a set of high-quality stocks and holding onto them for a long time. Here are the steps to build a coffee can portfolio:
1. Identify High-Quality Stocks: Start by identifying high-quality stocks with a history of generating strong returns and a sustainable competitive advantage and with a market cap of at least 100 crores. The Return On Capital Employed (ROCE) for 10 years should be more than 15%.
2. Determine the Investment Amount: Determine the amount of money you want to invest in your coffee can portfolio. This can be any amount, but it is recommended to invest in small increments over time to benefit from dollar-cost averaging.
3. Invest in the Portfolio: Invest in the portfolio of high-quality stocks, and hold onto them for a long time without actively managing them.
4. Monitor the Portfolio: Monitor the portfolio periodically to ensure the stocks meet your investment criteria.
Should I invest in a coffee can portfolio?
Coffee can investing is an excellent strategy for investors who are looking to build wealth over the long term and do not want to be bothered by short-term market fluctuations.
This strategy is best suited for investors who have a long-term investment horizon of 10-15 years or more and are willing to hold on to their investments for that period. The strategy is also ideal for investors who do not have the time or expertise to actively manage their investments.
Coffee can investing is unsuitable for investors looking for quick returns or unwilling to hold on to their investments for an extended period. It is also not suitable for investors who are risk-averse as investing in stocks always carries a certain level of risk.
How smallcases are designed keeping coffee can investing in mind?
Smallcases are designed to align with the coffee can investing strategy in several ways:
- Long-term orientation: smallcase portfolios are designed with a long-term orientation in mind. The platform’s algorithm selects stocks and ETFs based on their long-term growth potential, rather than their short-term performance. The goal is to provide stable returns over the long term by investing in companies with strong fundamentals and competitive advantage.
- Diversification: smallcase portfolios are diversified across sectors, industries, and asset classes. This helps to spread the risk and reduce the impact of any individual stock’s performance on the overall portfolio. Diversification also allows investors to capture the growth potential of multiple sectors and industries.
- Quality-based selection: smallcases lets you invest in high-quality companies with a competitive advantage, strong financials, and a long-term growth potential. The platform’s algorithm uses a quality-based selection process to identify such companies. This helps to ensure that the portfolio is made up of companies that are likely to perform well over the long term.
- Low turnover: smallcases are designed to have a low turnover rate. This means that the platform’s algorithm does not make frequent changes to the portfolio, which can lead to higher transaction costs and tax implications. Instead, the platform aims to hold the stocks and ETFs for an extended period, ideally forever, in line with the coffee can investing strategy.
- Regular rebalancing: smallcase portfolios are rebalanced periodically to ensure they remain aligned with the coffee can investing strategy. The platform’s algorithm uses a disciplined rebalancing approach to adjust the portfolio’s weightings based on the changing market conditions.
Coffee Can Investment is regarded as a great style of investing where the investor just needs to make an appropriate investment selection based on extensive study and in-depth knowledge and can then relax and take advantage of compounding to enjoy the benefits made from the investment.
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