Coffee Can Investing is an interesting strategy and I have never seen anyone wrote about it. A stock portfolio built using this strategy is called a Coffee Can Portfolio. I first heard of it when reading a blog post at Sipping Coconuts.
In simple terms, you buy the stocks of good quality companies and forget about it for 10 years or more.
“Our favorite holding period is forever. – Warren Buffett”
Holding the stock for 10 years is easier said than done. This is because an investor’s emotions ups and downs during a stock market downturn is crucial which differentiates the quantum of the success of one investor from another.
Benefits of Coffee Can Investing
Based on what I have read, Coffee Can Investing has less risk as compared to value investing or growth investing.
Value investing means buying companies that are undervalued, hoping that the value will be realised in the future. Growth investing means purchasing companies during their growth phase.
Both value investing and growth investing are high risk towards higher returns.
Drawbacks of This Strategy
The performance of a Coffee Can portfolio heavily depends on your original stock selection.
One of the conditions of this strategy is that you need to hold the stock for 10 years or more. Thus, you can only judge the performance after 10 years.
How Did Coffee Can Investing Came About?
The concept is based on a research done by Robert G. Kirby. He was considered as one of the greatest investment advisors of all times.
The concept has its roots in Old West America where the people used to hide their valuables in coffee cans. The coffee cans were placed under a mattress for years or decades.
How to Select Coffee Can Stocks?
I am not an expert with selection of coffee can stocks, however below are the criteria that I have found
- The company need to be established, which means it need to exists for more than 10 years. These are usually large cap companies.
- The revenue growth of the company must be at least 10% each year for the last 10 years.
- ROCE (“Return On Capital Employed”) of 15% in each of these 10 years. The formula for ROCE is Net Income/ Shareholders Equity.
It’s the method used by some famous lower wage workers in the US (often janitors or some factory worker), who after they passed away, shocked their families when they discovered their wills disbursing millions of dollars in stocks that had been bought & held for decades. Usually a large portion of their fortunes will also be designated for charities & donations. And local newspapers will report about them.
In the 2000s, coffee can investing was popularised in the US & passive investing world, and modified into an ETF-based allocation “coffee can portfolio” for long term holding.
I do this partly in my own stock portfolio. I have a foundation of long term compounders. Some of them I have held for 10 years. I do this and add a bit of value or growth if I find it. I truly believe all investing should be value investing even if someone classifies a particular company as a growth investment.