Coffee can Investing
Coffee can investing by Mukherjea, Rakshit et.al is a great book to understand the power of equity in Indian context. Instead of presenting facts, this books is full of concrete data and examples.
Coffee Can Investing refers to “buy and forget” approach to investing in shares of companies which have performed well consistently.
The idea of the Coffee Can portfolio traces its roots back to the American Old West, when people would secure their valuables by putting them in a coffee can. The coffee can was then placed under their mattress for safe-keeping, where it stayed for years, or even decades. A portfolio manager by the name of Robert Kirby proposed in 1984 that investors could the follow the same approach — identify a diversified portfolio of consistently performing companies, invest in their stocks and keep invested for at least 10 years.
How to screen stocks for a Coffee Can Investment Portfolio?
In the Indian context, coffee can portfolio has been defined in book to refer to companies which have
- above Rs 100 crore market capitalization - generate revenue growth of more than 10% every year, over the last 10 years - geterated return on Capital (ROCE) over 15% every year
Key takeaways from the Book
- It is important to not adhere to the age-old wisdom of investing heavily in fixed deposits, real estate and gold. These assets have unperformed equity by significant margins over long periods of time. In fact, these assets have often given returns lower than inflation over long periods of time and thus damaged investors’ wealth.
- learning from legendary investors like Warren Buffett, Akash Prakash, Sanjoy Bhattacharyya and K.N. Sivasubramanian is that to consistently generate healthy returns from equity investing, one has to invest in high-quality companies and then sit tight for long (often very long) without losing sleep about where the share price is going.
- Unlike earlier years, the alpha (or outperformance) in large-cap equity mutual funds is now negligible. In this scenario, it makes much more sense to invest in passive funds or ETFs. Already, in the US, active funds have started seeing massive outflows, which are becoming inflows for passive funds.
- A broker suggesting funds to an investor leads to a conflict of interest. Driven by SEBI, the country has already moved on to an ‘only advisory’ or ‘only broking’ model. Thus, an investor is better off paying a certain percentage as advisory and investing in the most inexpensive funds (as opposed to the traditional practice of using an intermediary who is remunerated by the fund manufacturers).
Quotes from the Book
The book is lined with some great quotes and these are cleverly intertwined with the concepts they want us to teach.
‘The best time to plant a tree was twenty years ago. The second best time is now.’— ancient Chinese saying
‘For indeed, the investor’s chief problem—and even his worst enemy—is likely to be himself.’— Benjamin Graham, The Intelligent Investor (1949)
‘An investment in knowledge pays the best interest.’— Benjamin Franklin
‘The ancient Romans were used to being defeated. Like the rulers of history’s great empires, they could lose battle after battle but still win the war. An empire that cannot sustain a blow and remain standing is not really an empire.’— Yuval Noah Harari, Sapiens: A Brief History of Humankind
‘Many of the truths we cling to depend greatly on our point of view.’— Obi-Wan Kenobi, legendary Jedi Master
‘I have seen many storms in my life. Most storms have caught me by surprise, so I had to learn very quickly to look further and understand that I am not capable of controlling the weather, to exercise the art of patience and to respect the fury of nature.’— Paulo Coelho
‘A man who has committed a mistake and doesn’t correct it is committing another mistake.’— Confucius (551 BC–479 BC)
‘Some people want it to happen, some wish it would happen, others make it happen.’— Michael Jordan