What is Coffee Can Investing?
Back in the past, people in American Old West used to put their valuables in a coffee can and places them under the mattress. Usually, people forget about it and those cans stay there for years and sometimes even decades. In the year 1984, an investment manager named Robert Kirby suggested that investors can use this coffee can method. Using this strategy, investors put their money into consistently performing companies. They diversify their investments and hold them for a long term (minimum 10 years). The main logic behind coffee can investing is “buy and forget”.
Coffee Can Investing over Mutual Funds
The main reason for choosing coffee can investing over mutual funds is to avoid paying fees to the mutual fund houses. Most of the mutual fund schemes come under active investing, where fund managers actively track the portfolio and adjust it accordingly. Mutual funds always try to beat the index fund returns. This can be achieved through the skills and work done by a fund manager. Fund manager salaries, advertisement etc are some of the expenses to the fund house. These expenses are passed onto the mutual fund investors through fees. To avoid such extra fees investors choose coffee can investing over mutual funds.
How to build a coffee can portfolio?
Compounding and dividends are two of the benefits of long-term investment. You will get a proportion of your assets when a business declares a dividend. The majority of a coffee can portfolio’s focus is on stock quality. As an investor, you must select a high-quality stock that represents a fundamentally sound firm. Here are some ideas for putting up a coffee can portfolio.
1. The business should have been around for at least ten years.
2. Revenue increase of at least 10% year over year.
3. For ten years, the return on capital employed (ROCE) must be at least 15%.
4. A market capitalization of more than 100 crores is required.
5. The firm should have a strong brand.
6. The organisation should have a competitive advantage.
Use any freely available stock screener to find companies with the above qualities. Once you pick the companies, diversify and invest the funds into those companies equally. Review the annual reports and churn the portfolio every year.
Coffee can investing is for long term investors. Usually, the performance can be observed only after 10 years. This method of investing becomes famous because of its returns. Yes, coffee can investing gave more returns than the benchmark index. To build a coffee can portfolio investors should invest their time researching about the companies.