What is Coffee Can Investing?
Are you also looking at the pile of your clothes and telling yourself you’ll do the laundry on the weekend?
You are also one of them, who procrastinates everything, from going grocery shopping to cleaning your room?
If yes, then I have a perfect investing strategy for you my friend! It’s for the lazy noobs like us that this strategy of Coffee Can Investing was born. So, Sourabh Mukherjee, through his book “ Coffee Can Investing ” has introduced us to this strategy.
Well, before we start with strategy, there is a very interesting story of how this strategy was developed. So, in 1960, there was a fund manager, Robert Kirby, he had a client whose husband bought shares of $5000 each on his recommendation but never sold those shares. After he died, they discovered that he had created enormous wealth. His investments were worth more than $8,00,000, due to his investments in Xerox. Kirby was quite impressed with his buy and forget strategy and named it Coffee Can Investing. The name was Coffee Can because back in the days, in native America people used to keep their valuables in coffee cans.
While the strategy sounds simple on the outside, its really difficult to follow it because its very very hard to not get affected by the volatility in the markets and hold stocks for more than 10 years, but it's time you be lazy with your investment approach as well my friend because this strategy has not just beaten the benchmark since 1990, but has also given 20 - 25% annualized returns.
Not just the returns are on a higher side, the process of shortlisting the stocks through coffee can strategy is also simple, you just need to apply two simple filters and you are set.
The first requirement of a coffee can portfolio is that the company should have a market capitalization of more than 100 crores, as you see there is not a lot of reliable information available on the companies that have a market cap less than 100 crore, there is a lot of information asymmetry with these companies.
Then we look for companies that have grown their sales each year in the past decade by more than 10% alongside generating a Return on Capital Employed ( Pre-tax ) of more than 15%.
Now, you may ask why these filters?
Well, ROCE basically tells us how much returns a company is generating on the capital deployed ( Equity + Debt ), it basically reflects a company’s ability to generate returns on the capital and it reflects the capital allocation ability of the company. Also, he believes that the returns from a stock mimic the earnings growth in the long run.
According to Mukherjee, they expect a return of more than 15%, because it is a bare minimum requirement to beat the cost of capital in India. Also, the risk premium should be 5% - 6%, as there are other risk free and moderately risky assets that have a return on capital of 7% - 8%.
Further, the strategy requires the company to have sales growth of more than 10% in the last decade, because Indian Nominal GDP has grown at 13% in the last 10 years and therefore a company that has a sales growth higher than the GDP growth is eligible to be in the criteria.
Why Coffee Can Portfolio outperforms the benchmark?
1. The volatility is less in the long term
2. In the long term the power of compounding plays its magic!
3. Holding a stock for a long term, and not churning the portfolio saves a ton of your brokerage fees.
While the Coffee Can strategy is simple, it is quite difficult to follow, because let’s accept it, volatility does affect our decisions while investing, but if you are willing to be patient then this strategy can generate multibagger returns for you. Create your own Coffee Can portfolio with 5 paisa.