What Is Coffee Can Investing?

Coffee Can Investment is just another way of saying "buy and forget." The stock market is uncertain and turbulent in the short term, but as the time horizon gets longer, it stabilises and becomes more predictable. This is a characteristic of the stock market that the Coffee Can Investing approach leverages and makes long-term investments in.

How Coffee can Investing Strategy Emerged?

The majority of consumers purchase shares without doing any research first, and they monitor their performance everyday, which is not recommended for long-term investors. Robert Kirby, a fund manager, came up with the phrase "coffee can investing" in 1984 when one of his clients' husbands bought shares worth $5,000 on his advice but failed to sell them.

Robert only came to the realisation that the $5,000 investment had grown to more than $8,000,000 when his client's husband passed away, primarily as a result of the investment in the company XEROX. This method was given the nickname "Coffee Can Investing" by Robert Kirby after he was impressed with it. In Old West America, before the ubiquitous banking system was developed, individuals would store all of their valuable goods in coffee cans and not really touch them for a long time. This is where Robert Kirby got the idea for the name Coffee Can.

The most notable success story of a coffee can investing approach was that of Rakesh Jhunjhunwala. In 1993, he purchased 4.4 crores of Titan shares for Rs. 3. and still possess those shares, with Titan's share price currently standing at $2500 per share.

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How Coffee Can Investing Became Famous in India?

Saurabh Mukherjee made the phrase "coffee can investing" popular in India. While Saurabh Mukherjee was the CEO of Ambit Capital in 2018, his team started an investigation to see how the Coffee Can method affected Indian investors.

His team discovered that this approach produced extraordinary outcomes and that the Coffee Can portfolio not only outperforms the Sensex over time but also does well when the market declines.

Saurabh's team applied some very basic criteria to identify a small number of companies that made up the Coffee Can portfolio in order to investigate it. Because the average Coffee Can portfolio has only 12 companies, compared to the close to 7,000 companies that make up the stock market, these filters set a high standard for businesses to meet.

How to Create a portfolio using Coffee Can Investing Strategy?

The main goal of Coffee Can Portfolio is to choose high-quality stocks for the long term. Investors should only put money into companies with solid fundamentals, keeping in mind the following considerations:

1). Select companies whose market cap is greater than 100 crores

You only choose firms for your Coffee Can portfolio that have a market capitalization of more than 100 crores. Learn about the top 10 Indian firms by market capitalization. Companies with a market valuation of less than 100 crores do not have access to a lot of reliable information, and there is a good probability that these businesses will misrepresent their financial data.

2). Check whether a company has generated a ROCE of 15% or more in the last 10 years

A financial measure called return on capital employed (ROCE) can be used to evaluate the capital efficiency and profitability of an organisation. It assists us in determining how well a company is turning a profit on the money it invests in the business. The better the corporation is at allocating its capital, the greater the ROCE.

Because a corporation must make a minimum profit to cover its cost of capital, a minimum ROCE of 15% is chosen. The golden rule is that a business should only fund endeavours that offer returns greater than its cost of capital.

3). Revenue of the company should be at least 10% on a year-to-year basis

Between 1991 and 2000, Saurabh Mukherjee and his research team at Ambit Capital used the Coffee Can filters to assess various companies. Starting in the year 2000, they started creating Coffee Can portfolios each year by adding or removing companies depending on the aforementioned filters. He found that the Coffee Can Portfolios consistently outperformed the Sensex over a period of 15 years beginning in the year 2000.

What makes the Coffee Can Portfolio effective?

1). Less Volatility

Market volatility is one of the main causes of share market losses, but with the Coffee Can Investing method, you stay invested for longer periods of time, which lessens the influence of market volatility and allows compounding to work its magic.

Consistency: During the past ten years, companies in the CCE portfolio have consistently produced 10% growth and 15% ROCE. Long-term upkeep of these growth rates becomes extremely difficult.

Here, management is crucial since attaining these goals shows that a company's management is adept at allocating funds for projects and making decisions that ensure value is made for shareholders, which makes Coffee Can companies boringly consistent.

2). Domination

A company has something truly special if it can increase its sales year after year for ten years. Companies in the Coffee Can portfolio have a substantial market share because they are leaders in their respective industries.

3). Winner Companies

A company has something truly special if it can increase its sales year after year for ten years. Companies in the Coffee Can portfolio have a substantial market share because they are leaders in their respective industries.

To Sum Up

The Coffee Can Investing approach is straightforward on paper, but in practise it is challenging to carry out because short-term volatility puts our patience and moral fortitude to the test. Because the human mind is susceptible to many biases and illusions that cause us to undermine our own financial freedom, it takes a lot of patience and resolve to resist being swept away by market conditions.