External Article: Coffee Can Portfolio…Invest & Forget!!!

Background

Even in the presence of the World Trade Organization(WTO), there are fears of a trade-war being waged between the United States of America(USA) and the People’s Republic of China(PROC) over tariff imposition on certain Chinese goods.

 

Image result for us china trade war

Fig. 1 Ongoing US-China Trade War[1]

 

This incident has spooked the world market leading to correction in the indices and re-allocation of the money to safer havens like gold.

 

It also brings back memories of an incident which brought the financial system of the world to its knees less than a decade ago…

 

The Global Financial Crisis

 

The financial markets around the world corrected quite significantly then. Governments around the world had to bail out their banks, companies due to the financial crisis. The lingering effect of the crisis still persists.

 

Related image

Fig. 2 Global Financial Crisis of 2008[2]

 

Despite all the Red Herring, Value Investors like Ben Graham, Warren Buffet etc. have always advocated using occasions of like these to buy into quality companies which can give tremendous returns when normalcy returns.

 

Considering this, can retail investors follow this thought??

Undoubtedly, Yes!!!!

 

How can they do it??

Coffee Can Portfolio for Investing…….

 

 

Definition

Coffee Can Portfolio(CCP) can be linked to the Old West where people would secure their valuables by keeping it in a coffee can under a mattress before the ubiquitous banking system was established[3][10].

 

Related image

Fig. 3 A layout of the Old West in USA[17]

 

Robert Kirby, one of Capital Guardian Trust founders, was the pioneer of this principle of investing[7].

The idea is to “Buy & Forget”. This allows the stocks to ride the turbulence and give fantastic returns to the investor.

The pre-requisite, investors need to buy quality Blue-chip stocks and simply hold them long for compounding to work its miracle.

 

Image result for compounding einstein

Fig. 4 Einstein’s view on Compounding[4]

Advantages of CCP[3]

  • With long-term holding, investors can avoid fees/costs that normally reduce the returns
  • Investment takes the priority over trading/churning stocks which allows compounding to work

 

Image result for coffee can portfolio results

Fig. 5 Example of a Coffee Can Portfolio[16]

 

 

Disadvantages of CCP[7]

  • A large fee needs to be paid at the start for supporting an excellent research organization which would suggest investments for a 10-year portfolio
  • Very few takers for the Coffee Can Portfolio(CCP) considering the long gestation period

 

 

Further Reading

  1. R. Kirby, “The Coffee Can Portfolio: You Can Make More Money Being Passively Active than Actively Passive,” The Journal of Portfolio Management, Page 76-80, 1984
  2. B. Barber and T. Odean, “Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors”, THE JOURNAL OF FINANCE,  Vol. LV, No. 2, 2000
  3. http://csinvesting.org/wp-content/uploads/2013/06/The_Coffee_Can_Approach_Michael_Mauboussin.pdf
  4. https://www.vccircle.com/coffee-can-portfolio-buy-and-forget/

 

Conclusion

 

Related image

Fig. 6 Einstein’s view on Compounding[18]

 

Taking this thought ahead, retail investors can make exceptional gains from their investments. The Coffee Can Portfolio(CCP) is simple – “Buy & Hold” Quality stocks.

Despite some downsides, CCP seems to be a great way to invest and make money in uncertain times.

 

References

  1. http://nowreadthisnews.com/2018/04/03/fears-of-a-trade-war-between-the-united-states-and-china-just-escalated-again/
  2. http://www.scmp.com/comment/insight-opinion/article/2120679/another-global-financial-crisis-imminent-and-here-are-four
  3. http://www.nasdaq.com/article/the-coffee-can-portfolio-cm752199
  4. https://www.thewealthwisher.com/2017/01/03/compounding-8th-wonder-world/
  5. http://csinvesting.org/wp-content/uploads/2016/12/the-coffee-can-portfolio.pdf
  6. https://www.vccircle.com/coffee-can-portfolio-buy-and-forget/
  7. http://csinvesting.org/wp-content/uploads/2013/06/The_Coffee_Can_Approach_Michael_Mauboussin.pdf
  8. http://articles.latimes.com/2005/apr/20/local/me-kirby20
  9. http://www.nasdaq.com/article/the-coffee-can-portfolio-cm752199
  10. https://www.valueresearchonline.com/story/h2_storyview.asp?str=29778&&utm_medium=vro.in
  11. https://economictimes.indiatimes.com/markets/expert-view/how-ambit-coffee-can-is-a-10-year-twist-on-buffets-investment-philosophy/articleshow/61750102.cms
  12. https://www.scribd.com/document/333043477/Ambit-Capital-Strategy-Errclub-the-Coffee-Can-Portfolio-2016-Thematic
  13. https://groww.in/blog/the-coffee-can-portfolio/
  14. https://www.quora.com/Is-there-a-coffee-can-portfolio-available-for-Indian-equity-market
  15. https://talk.smallcase.com/blog/coffee-can-portfolio/
  16. http://www.gettingyourich.com/blog/coffee-can-portfolio
  17. http://timothykurek.com/10-cartoon-western-town/western-town-google-search-pan-layout-reference-pinterest-on-cartoon-western-town/
  18. http://www.azquotes.com/quote/730218
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