The stock market is rife with traders and investors working out new strategies or mechanisms to trade in the markets. The sole aim behind this hustle is to try to figure out a way to earn substantial profits. Various approaches are tried and tested daily while some strategies survive and others become extinct. One such strategy is the “Coffee can” investing strategy. As unique as the name sounds the strategy itself is unique. Deep dive into the article to gain insights into the coffee can investing strategy.
What is Coffee can investing strategy and what does it mean?
The coffee can investing strategy works by keeping a long-term perspective in vision. Under this strategy, an investor scrutinises the entire stock market and upon careful analysis of the market picks up some particular stocks. These stocks cannot be selected at random and they require a detailed analytical study of the market before being finalised. The theory aspect of the coffee can investment strategy talks about various parameters which are considered before picking up stock for this process.
After finalising the stocks they are bought with the thought that they will be kept for safekeeping for an around 10 years or more. The lock-in period should be ten years and not below that.
The basic principle behind this mechanism is the thought that over the years the stock market always grows and never declines.
Therefore these stocks are bought with this vision.
This principle allows you to focus on the long-term vision behind a stock while ignoring any aspects of short-term volatility that accompany the stock.
In layman’s terms, the coffee can investment strategy sounds like the “invest and forget” method.
Technically this sounds similar to the mechanism used by an Indian housewife wherein she keeps a portion of money with the safekeeping aspect in mind. The money is usually stored away and kept for a rainy day.
However, the point behind it is saving money from daily expenses and saving it for a long-term period so that it helps on a rainy day. The concept doesn’t seem to have undergone a heavy iteration because now the money is kept for safekeeping in a Demat account.
How did the coffee can investing strategy originate?
The name coffee can is derived from a cultural practice in America. Before rampant urbanisation, any important documents about assets or any specific assets would be bottled up inside coffee cans. These cans would further be buried inside the ground. These assets would be unearthed in future on some special occasion. Thus the strategy was named after this practice.
The strategy was developed by Mr Robert Kirby.
He used to work as an analyst who helped clients with picking up stocks and shares. In the year 1960, he advised one of his clients to purchase stocks from various companies.
After some time the client died and the investment was lying idle in the client’s account. Although they had purchased it with the intent of selling the stocks, the sale deeds couldn’t be initiated and the investment was left alone.
After more than a decade had passed Mr Kirby checked his client’s account and realised that the value of the investments had increased drastically and had resulted in heavy profits.
This incident led Mr Kirby to the idea of purchasing stocks with good performance and a magnificent future trajectory. Thus the idea of a coffee can investment strategy was developed.
Coffee can investing strategy in Indian stock markets
The coffee can investment strategy reached Indian markets through a dual pathway ie. Industry players and a book. A book authored by Saurabh Mukherjee was titled Coffee Can investing. Apart from this Amitabh capital was the industry voice which supported this investment strategy.
What is the process of building a Coffee Can portfolio?
The strength of the portfolio determines your long-term profit therefore extra caution should be exercised before proceeding with this process. There are various parameters which should be considered before choosing a particular stock for your Coffee Can portfolio. The parameters are as follows.
A very basic example of how stocks are selected for a coffee can portfolio is as follows.
If an organisation listed on the stock market sells soaps then its revenue metrics won’t be depleted even if the price of soap rapidly increases. These stocks which fall beyond the ambit of such daily market fluctuations are selected.
The company should have passed ten years before being established. This ensures that it isn’t a “fly-by-night” venture.
- Ten per cent revenue growth should be witnessed every year.
- At Least 15% growth of ROCE for ten years.
- The market capitalisation should have surpassed the 100 crore mark
The company should have excellent brand value paired with a sharp competitive edge in the market.
What are the mechanisms for investing in a Coffee Can portfolio?
Coffee Can investments can be initiated through three pathways which are as follows.
The process of utilising SIPs is a very stable method for curating a coffee can portfolio. Primarily the user will have to pay money to the platform every month.
Investing through the process of depositing a lump sum amount for a coffee can portfolio is an approach that would have a multitude of benefits. Primarily employees can deposit the lump sum amounts of their bonuses in coffee can investments.
Buying the dips is a riskier approach. The process works in a simple manner wherein an investor analyses a stock which might have recently fallen from its pedestals. In the pedestal market, e stock owner buys such stocks at a much cheaper price with an expectation that the price might rise in future.
What is an instant 4-step mechanism for investing in a “Coffee Can portfolio”?
- Focus on diversification. Don’t buy a single stock repeatedly.
- Pick out companies that are operating market leaders.
- Curate a portfolio consisting of 10-15 companies.
- Single out a company which has an exceptional track record
Does coffee can investment strategy work in Indian market?
The coffee can investing strategy seems to be a sound concept and the theory is very well aligned for the US market. However, there are some bottlenecks when it comes to Indian markets.
Minimal companies that fit the qualification criteria
If we analyse the factor utilised for selecting a company for coffee can investment strategy only four companies in NIFTY 50 can fit the criteria. These companies are ITC, Lupin Pharma, HCl technologies and Asian Paints.
The investment sector in India is literally under the hold of a herd mentality. There’s always a chance for investors to sell the stocks during a rampant bear market phase which goes against the fundamentals of Coffee Can’s investment strategy.
Coffee Can investing is an exceptional theoretical concept but when it comes to the Indian context various factors come into play. Therefore always invest a minimal part of your corpus funds in Coffee Can investments.
What is better? Mutual funds or Coffee Can portfolio
Both of these mechanisms are perfect but it depends on the user. If the user wants to invest in stocks without putting in too much time building a portfolio they should go for mutual funds. However, if the user can invest time in analysis the best option is Coffee Can portfolios.
Why is diversification important in the Coffee Can portfolio?
Diversification is very important for Coffee Can investments because it directly helps in reducing the overall risk of the investment.
What did we learn?
- 1 What is Coffee can investing strategy and what does it mean?
- 2 How did the coffee can investing strategy originate?
- 3 Coffee can investing strategy in Indian stock markets
- 4 What is the process of building a Coffee Can portfolio?
- 5 What are the mechanisms for investing in a Coffee Can portfolio?
- 6 What is an instant 4-step mechanism for investing in a “Coffee Can portfolio”?
- 7 Does coffee can investment strategy work in Indian market?
- 8 FAQs