Coffee Can Investing is a low-risk way of making money by purchasing shares of outstanding companies for an extended period without actively trading. As we all know, the stock exchange can be a risky choice for investments and profits. Amidst the uncertainty, the Coffee Can Investment Strategy helps you reduce risk by investing in high-performance companies for over ten years and not selling them during that period.
Coffee Can Investing – Buy and Forget your shares
In simple words, the buy-and-forget strategy to investing in shares of companies that have consistently delivered adequately is referred to as coffee can investing. Such investment in shares produces a coffee Can Portfolio. Those who invest in such shares develop a diverse collection of consistently performing companies, buy their stocks, and retain them for at least ten years.
But the questions that arise here are – is the Coffee Can investing strategy this simple? Can you invest in any stock using this method? If not, what are the stocks that you should invest in?
Let’s answer these questions and understand the nitty-gritty of the coffee can investing method.
A Canned History
Veteran investment manager Robert G Kirby coined the term coffee can investing in 1984 on the concept where people used to hide their valuable assets, including gold and cash, in “cans” and hid them under the floor or stuffed them into mattresses. They used to forget about these savings, only to find them later to their surprise and joy of added wealth.
The bandwagon effect works through a self-amplifying mechanism. It uses a positive feedback loop to expand, which means the impact becomes more robust as more people join.
This age-old method of saving wealth can also be applied to the share market using the Coffee Can investment strategy. It is primarily a long-term investment strategy with a maturity period of at least ten years. At the end of the decade, you can realise substantial profits from a diverse portfolio of stocks.
Coffee Can Portfolio in the Indian context
Coffee Can Portfolio in the Indian context includes companies that have generated a Return on Capital (ROCE) of more than 15% per annum with the Coffee Can Investing approach. This makes the process a low-risk way to generate incredible wealth.
How to build a Coffee Can Portfolio?
The pandemic has pushed us to learn the fundamentals of market investment to generate a passive income. It is not a simple subject since real money is a concern. There are horrifying accounts where people have lost all their life savings rapidly.
There are some advantages to long-term investing. It is very profitable and fetches compounding dividends. When a company releases a dividend, you get more interest over your holdings.
Coffee Can Portfolio is mainly concerned with stock quality. The following parameters must be analysed while selecting stocks for your Coffee Can investment strategy.
- Invest in fundamentally strong companies.
- Market capitalisation should be above Rs. 5000 crores.
- The company should have a good brand value and a competitive advantage.
- Diversify your stocks and invest in different industries.
- Structure your portfolio
- Invest in no more than the stocks of 10-15 companies. These companies should be market leaders having an outstanding growth record of at least ten years.
- The revenue growth should be at least 10% year on year, not CAGR or SAGR.
- ROCE of at least 15% for ten years
- Use a Coffee Can Portfolio screener
Let us take an example of a milk company. If a milk company increases its product prices, will people stop having milk? Clearly, that will never be the situation. Similarly, the Coffee Can strategy is not heavily dependent on quantity and growth – it works on quality investing. You can find the Coffee Can Portfolio India 2021 on the internet.
The graph shows that if you invest for one year, you have a 68% probability of making a higher return (an almost 2/3rd profit return). But if the investment period is around 8-10 years, there are practically 0 chances of losing money on your investment in BSE Sensex, which is a diversified basket of top stocks.
Over ten years, 20-30% of companies in your portfolio might not perform at all or even underperform. 40-50% of companies may give a consistent but average growth. The remaining 20-30% of companies that outperform will average your portfolio to provide outstanding returns.
Investing in a Coffee Can Portfolio
- A lump sum investment can bring huge capital returns on your investment. You can do it once a year.
- Employees can use the bonus amount for lump sum capital investments.
- If you have significant income from real estate sales and business income, you can use it for lump sum investment.
Systematic Investment Plan
- A systematic investment plan (SIP) helps a salaried person invest a pre-determined amount monthly.
Buy on Dips
- Buying a low-price asset (security) after its value falls with the hopes that it will recover in the future with an upward trend is called Buy on Dips. You can use this method to buy new assets or simplify an existing investment portfolio.
Concerns – what if I lose all my money?
Coffee Cans are non-perishable. So, even if you forget about the money in a coffee can investment portfolio, you will not lose it.
- You earn dividends over and above the stock price.
- The chances of making negative returns are meagre.
- As you invest in the present and sell after many years, the transaction costs reduce significantly.
In a nutshell, Coffee Can Portfolios are proper for investors who prefer to get a higher yield than index funds and are prepared to invest for over ten years. For those who want to invest passively, it is a viable option to other choices.