What is Coffee Can investing?

The sole aim of investors and traders is to gain maximum returns from their investments at the same time achieve wealth creation through substantial investments. To meet this objective, they apply various strategies and techniques that are usually tried and tested and have general acceptance from the majority of investors and traders. One of the many investing strategies applied by investors across the globe is the coffee can investing strategy. 

Given below are the meaning and related details of the coffee can investing strategy and why it is still popular even after decades of its origin.

What is the meaning of coffee can investing?

Coffee can investing strategy, while the name sounds amusing, is based on a very in-depth study of stocks and selecting them for investment. Under this strategy, investors invest in quality stocks by applying certain parameters to ascertain their viability and growth trajectory and follow the buy and forget principle. These stocks or investments are bought with a long-term investment horizon of more than 10 years. This long-term investment horizon allows the investment to grow multifold and the investors do not need to worry about short-term volatility. 

Most Indian women have been applying this strategy of saving even without knowing its name or relevance on the global platform or stock markets. In the olden days, Indian women would store extra cash in grain containers as part of their savings which could be later used in times of emergency. While the concept is similar to this ancient practice, instead of grain containers, the investment is now held in the Demat account of the investors. 

What is the origin of coffee can investing?

The origin of the coffee can investing strategy can be found in America. In the olden days in the country, people would store important documents or assets in coffee cans and would bury them for safekeeping. This was way before the concept and banks came into the picture and banks became popular. In those days, storing the valuables in a coffee can for safekeeping was the norm. Most people would often forget about their savings in the coffee can or would not touch them for decades. 

In 1960, Mr. Robert Kirby had advised his client to invest in some stocks and had never sold them eventually. When the client passed away that investment had increased significantly and amounted to significant wealth. This gave Mr. Kirby an idea and he coined this buy and forget strategy as the coffee can strategy in 1984. Under this strategy, investors are advised to purchase significant shares of a company that has a sound business plan and good growth trajectory for a significant amount of years. These investments should be held for a period of at least 10 to 15 years to generate substantial returns. 

How to apply the coffee can investing strategy in Indian markets?

The coffee can strategy was introduced in the Indian stock markets by Mr. Sourabh Mukherjee through his book ‘Coffee Can Investing’ and Ambit Capital, India’s leading financial advisors. There have been established parameters that can be used to create a successful coffee can portfolio that can not only beat the benchmark but also provide annualized returns more than most successful dynamic investment options. 

Some of the important parameters set under this strategy are highlighted below. 

1. Investors should Target companies that have a market capitalization of a minimum of Rs. 100 crores.
2. The return on capital employed (ROCE) of the company should be at least 15%
3. The revenue growth of the company should be a minimum of 10%. This measure is to be considered on a year-on-year basis and not as per the CAGR.
4. The company has to be in existence for a period of more than 10 years
5. The other parameters that an investor has to consider include the management of the company, the relative position of the company in the industry, and its brand value.

Apart from the above parameters, novice investors or investors with limited knowledge to evaluate a company can use the coffee can portfolio screeners to curate their portfolio or use the experience and expertise of professionals instead. 

Why does the coffee can portfolio perform well?

The coffee can investing strategy is very simple to understand and apply even for beginners. This strategy involves less risk and hence it is ideal for risk-averse investors as well. The key factors that work in favour of this strategy include,

• Long term investment horizon allows the investment to grow without any hassles of short-term volatility
• Investors can invest regularly through lump sum mode or SIP and get the enhanced benefit of compounding in the long term.
• Investors can avoid the excess cost on account of frequent redemption or liquidation of their securities which further adds to their returns.
• Tax on the long-term gains is lower for equity and equity-related instruments as well as debt and debt-related instruments as compared to short-term returns from the same. The reduced taxes further add to the overall returns from the investment.

What are the factors to look out for in the coffee can strategy?

Coffee can investing strategy has been one of the many popular investing strategies across the globe. However, it is not necessary that it will always work. For this strategy to work, investors have to understand the core parameters that are significant for the Indian portfolio. Also, the stock selection has to be appropriate and diversified to weather any volatility in any particular sector. Although the strategy is based on the buy and forget concept, in today’s world it is practically not possible. With the dynamic nature of industries and the changing technologies, it is prudent that the portfolio should be regularly reviewed and rebalanced. Also, the stocks selected should have more or less a monopolistic position in their industry and a product that has assured demand or is dynamic enough to be altered according to the changing demand in the times to come.

Why mutual funds is better than coffee can investing?

While Coffee Can Investing is a popular strategy for long-term investing in India, mutual funds may offer even better returns and wealth creation. Here are a few reasons why:

• Quality Companies: There are only a few companies in India that meet the criteria for Coffee Can Investing.
• Investor Behaviour: Most investors are likely to sell non-performing or loss-making stocks during bear phases or stagnancy, which reduces the overall returns of Coffee Can Investing.
• Outperformance by Mutual Funds: Actively managed equity mutual funds in India have consistently outperformed their benchmarks by 8-12% annualized returns compared to 5-7% from Coffee Can Investing.

Therefore, Mutual Funds may be a better choice for long-term investing and wealth creation in India.

4-Step coffee can approach

Follow this 4-step strategy to build a winning coffee can portfolio:

1. Pick companies that are leaders in their market.
2. Create a portfolio with 10-15 of these companies.
3. Review each company’s growth history.
4. Diversify your portfolio by investing in different types of stocks, instead of just one.

Conclusion

Coffee can investing strategy is among those strategies that can be evergreen no matter which country is targeted as well as can be used by both risk-averse as well as aggressive investors to build their wealth in the long term. The wide acceptability and ease of application are what make it relevant in any market. However, investors have to be patient and learn to ignore the short-term noise to gain substantial returns at the end of their investment horizon. 

FAQs on Coffee Can Portfolio