Coffee Can Investing
Coffee Can Investing is a long-term investment strategy in which you buy stocks and forget about them. The term was first coined by Robert J. Kirby in 1984. The strategy offers you the benefit of low taxes along with low transaction costs.
The Story Behind Coffee Can Investing
The story behind Coffee Can investing goes back to old west America where people used to store their valuable items in coffee cans for safekeeping and hid them under their mattresses. They used to store it for years, and sometimes even decades.
Robert J. Kirby observed this pattern in stocks when he worked in a large investment advisory organization. One of the company’s woman clients who had just been widowed wanted to transfer her husband’s securities to her portfolio. Robert Kirby observed that the husband had been purchasing stocks in his portfolio based on the recommendations the wife used to get from the investment organization. However, the husband only used to follow buy recommendations and ignore sell orders. The husband invested $5,000 in all stock purchases. This led to huge wealth creation for the client over about ten years.
After reviewing the husband’s portfolio, Kirby noticed that many stocks were worth only $1,000. But many investments were worth $100,000 and above. One holding of Xerox shares was worth $800,000 exceeding the wife’s whole portfolio. This was a huge surprise to the wife. Robert Kirby liked this strategy of simply buying the stocks and forgetting about them. Eventually, Kirby coined the term Coffee Can Investing in his 1984 paper.
What is Coffee Can Portfolio?
The coffee can portfolio uses the same rationale of buying stocks and forgetting about them for a long time. It generally involves investing for 10 years. Today, investors keep on shifting their investments, incurring huge amounts in transaction costs and taxes. The coffee can portfolio allows you to enjoy low transaction costs along with the advantage of compounding. Many famous investors such as Warren Buffet have remained invested in the stock market for the long term and this has allowed them to enjoy huge returns on their investment.
How to create a Coffee Can Portfolio?
- Understand the future potential of the industry in which the company is present and invest accordingly.
- Select stocks of those companies that are market leaders and enjoy a competitive advantage.
- Select stocks of companies that have a proven track record of revenue growth & earnings over the previous 10 years.
- Invest in companies having a high return on capital employed and growth over the previous 10 years.
- Look at the management structure of the company and analyse if the company has been able to deliver on its past promises.
- Don’t invest too much in a single stock and diversify your investments.
Advantages of Coffee Can Investing
- Avoiding large transaction costs and huge short term capital gain taxes due to longer investments.
- As the strategy is long-term oriented, you will enjoy the benefit of compounding enabling your investments to grow hugely.
- Investing in good quality stocks allows you to have a lower probability of risk along with higher chances of good returns over the long term.
- Portfolio will be unaffected by short term volatility.
- Even if few stocks turn out to be bad, there is a high probability that other stocks will more than makeup for it.
- Low amount of time required for analysis and observation after the initial investment.
- A portfolio following all the steps of coffee can investing will have good chances of performing better than the market and beating it.
Disadvantages of Coffee Can Investing
- Large amount of fee and time will be required for the initial analysis and research of stocks for the Coffee Can portfolio.
- You may not have the patience to wait for 10 years and may exit after looking at the short-term benefits you are getting. This will defeat the whole purpose of this strategy.
- Huge events affecting the market negatively may change your perceptions and you may withdraw the funds.
- The returns generated entirely depend on the stocks selected. You may not get good returns due to improper research or any changes in the business environment in which the company is operating.
- New companies may arise and replace the old market leaders, affecting the performance of stock prices.
- Buying and holding a poor-quality stock for long-term will have a huge negative impact on your wealth.
The amount of success achieved using the coffee can strategy entirely depends on the stocks selected. This strategy offers you the probability of lower risk combined with chances of huge returns on investment if the stocks are held for a long period. Achieving good returns with the help of this strategy requires financial discipline and a good amount of research while selecting the initial stocks.
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