what is a coffee can investing?
coffee can investing whats is the investing approach and how can be executed it in our lives In 1948 person Robert Kirby Introduced the term coffee can investing refers to a period in which container in cans usually coffee cans we would hide money, jewelry, and forget about it and after the many years pass just like how we sometimes find money in our pocket, the same way when we open our container and see money, jewellery the values of which is reduced to half due to inflation but it still was money. that you had forgotten about. And that was the logic of coffe can investing.
So coffee can investing is the approach where you invest your money in a place where even if you forget about it that money should grow for you very well and with minimal risk. Very well and with minimal risk this was a term that was coined in 1984 but in India, it become popular in 2018. When a book was published by the same name, coffee can investing it was written by the professionals who run ambit capital in India one of the largest and most successful investment firms here, and Saurabh Mukherjee who is the flagship bearer of this entire ideology at least in India. What is the coffe can investing and how can you replicate your own your self.
coffee can investing
First, as I introduced and established the coffe can investing is to park your money in such a place where you can forget about it for years but after those really long periods of time and very long periods are at least 10 plus years that money would have grown at a phenomenal pace does it work does it not work let’s see subsequently up is table
which is from the year 2000 to the year 2016. but this should be enough for you to get convinced and this says coffee can portfolios have consistently outperformed the Sensex says a coffee can investing portfolio would have given you 22.6 annual return base percent return and it has beaten the Sensex by 6.6%. the 6.6% is not returned from Sensex it is beaten the Sensex by 6.6%. And you will see that every year it has been the same case except of course just one year where it could not beat that and one year is too less a time for someone to have a coffee can portfolio but this first table should tell you coffee can portfolios have consistently in the past beaten the Sensex and by a considerable margin then try and make the math over a 10-12 year period and you will establish how big this can get.
Low risk of your portfolio: coffee can investing
The reason, why coffee can portfolio, is considered to be a very low risk is because of this chart. Here you can see the probability of generating positive returns. increases with the holding period for the Sensex and if it’s true for the Sensex it’s certainly true for the coffee can portfolio as well. If you buy a stock for one hour and sell it your probability of making a positive return is around 50% which seems right how much can change in an hour ? so 50-50.
If you buy and sell the stock within the month then the probability of you making a positive return is 55%. If you buy and sell the stock within one year then it is around 68% but the interesting piece. if you hold the stock for 10 years then the probability of your making a positive return is 99.4% which is close to 100%. If you hold the stock for 10 years, then you will get a guaranteed positive positive return which is incredible because this is almost like your favorite So now if it is minimal risk and it has outperformed the Sensex then what is a coffee can investing let’s find out.
4 things can comprise a coffee can portfolio
know how you can make it for your own coffee can portfolio and with minimal work stay on top of that portfolio for a really long while so in the book coffee can investing there are 4 things mention which is comprise the portfolio which should be present in a coffe can portfolio.
- The market cap should be greater than 500 crores. Market cap is short for Market capitalization, meaning a company value number of stocks into the stock price equals the market capitalization. So the first to create a portfolio is to choose only stocks which have a market capitalization or market cap of greater than 500 crores. I will add a little twist to this towards the end of that you can get a slightly batter returns as well as but it becomes your decision.
- Choosing a stable stock with a consistent good return we will choose a stock that is very stable and give us a consistently good return. A good qualifier of that is revenue growth. So coffe can invest says that is the last 5-10 years. Revenue growth should be minimum of 10% every year. So at least a 10% growth every year and at least for five years ideally 10 years. mostly we only have data of 5 years so I have chosen only 5 years and we will see how that works number.
- Return on equity or ROE It means how much return is generated on equity investment of the company and the return is calculated as the net income (profit) of the company over the total equity that is deployed. this is technical don’t be worried as there are many tools to find this. but the Roe should be greater than 15% for the last five minimum years.
- finally, return on capital employees/ROCE says that the company says that company makes debt investment along with equity investment right? So how does the return on this total capital employed show up in the metrics and should be greater than 15% again?
There are 4 metrics that comprise a coffee can portfolio. market capitalization greater than 500 crores revenue growth for last five years greater than 10 a return on equity last five years greater than fifteen percent return on capital employed last five years greater than fifteen percent.
Last point you have to become a passive investor. just because you can bye and sell on the stock market easily does not mean that if the market is a bit down then you get scared and sell it, no you have to sit on it for a really long while and only look at that portfolio once every year which is what I personally do. I dont believe much in stock picking because I know you need lots of research and expertise for stock picking. So last part of my equity investment is done in portfolios of stocks that are managed by others.
in fact, almost eighty percent of all my investments in the equity market are done through small cases or small cases. but about 20 percent is something that i have started to consider as a sip towards the long-term 10-year plus because 100% return over a 10-year period.
