‘In investing, as in auto racing, you don’t have to win every lap to win the race, but you absolutely do have to finish the race. While a driver must be prepared to take some risks, if he takes too many risks, he’ll wind up against the fence. There are sensible risks—and there are risks that make no sense at all.’—Robert Kirby quoted in Charles D. Ellis’s Capital: The Story of Long-Term Investment Excellence.
Coffee-can portfolio/investing is a concept based on the research done by Rob Kirby.
What is a coffee-can portfolio?
The Coffee-can portfolio concept traces back to the Old West, when people put their valuable possessions in a coffee-can, hid it under the mattress and literally forgot about it.
In simple layman language, one has to select a list of stocks/ mutual funds, invest in them and literally forget about it for a considerable amount of time say 10 years.
In1984, Kirby narrated an incident involving his client’s husband. The gentleman had purchased stocks recommended by Kirby in denominations of US$5000 each but, unlike Kirby, did not sell anything from the portfolio. This process (of buying when Kirby bought but not selling thereafter) led to enormous wealth creation for the client over a period of about ten years. The wealth creation was mainly on account of one position transforming to a jumbo holding worth over US$800,000, which came from a zillion shares of Xerox.
For a retailer, he balances the portfolio when returns go sluggish. A Professional will feel like its fiduciary responsibility to intervene if the portfolio underperforms. Therefore, it becomes difficult to leave the portfolio without rebalancing.
How to create a coffee-can portfolio? Creating a coffee-can portfolio is as simple as the concept is. You just have to follow these two basic steps :
Look for stocks which over the preceding ten years had generated a return on capital employed (ROCE) of at least 15 per cent and revenue growth of at least 10%. Invest in Companies that have trustworthy promoters, Industry outlook should be good for at least 15 years. For BFSI companies, since BFSI companies neither have revenues nor ROCE you will have to use different filters while choosing the stocks. The two filters for BFSI stocks are ROE (Return on Equity) @15% and Loan Growth @ 15%. You can make more money being passively active than actively passive.
The second important point is to invest in a long-term, which is, more than 10 years. It is important to not churn the portfolio during this time.
Why does this work?
That coffee-can involves no transaction cost, administrative cost, or any other miscellaneous costs.
A concern for a retail investor is the fee he pays to fund managers. High expense ratios, tax liabilities and transaction fees paid to brokers increase the sum of investment. These expenses look very small but over a considerable amount, it adds up to a hefty amount.
Let’s not forget about the tax benefits of long term investing. This example will make it easier to understand: Scenario 1- Mr A starts trading with Rs 10 lakhs. Presuming that he carries on his trading for 10 years and earns a return of 26% p.a. His capital grows from 10 lakhs to Rs 73.65 lakhs, thereby making a post-tax return of Rs 63.65 lakhs after getting taxed each year ( all 10 years) @ 15% p.a. Scenario 2-Mr. A decides to be an Investor for 10 years with the same initial investment of Rs 10 lakhs and returns of 26%. This capital got turned into Rs 100.85 lakhs and this total return is taxed @10% at the end of the 10th year amounting to 9.09 lakhs, leaving the post-tax return Rs 81.76 lakhs. The vast difference between the post-tax returns highlights the power of compounding and tax benefits of long term investing.
Some Disadvantages:
New industries have entered/is replacing old-timers, and by not churning portfolio, you constantly lose the opportunity to beat the market.
You will only be able to judge your performance only after 10 years.
Wealth creation will depend on the stocks selected, therefore, thorough research is required before proceeding.
“If you aren’t thinking about owning a stock for 10 years, don’t think about owning it for 10 minutes.”
- Warren Buffett
Write-up by: Prachi Chhugani
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