What is Coffee Can Investing?
Coffee Can Investing approach refers to “buy and forget” to investing in shares of companies which have performed well consistently. The concept of coffee can investing has originated from the US markets, where it is highly successful.
Long Term Portfolio
The right mutual funds for your long-term goals with inflation-beating growth plus risk management.
Indicative returns of 10-12% annually
Investment horizon of 5+ Years
Long term goals such as retirement or building your wealth
The story behind the Coffee Can portfolio traces its roots back to the American Old West. Back then, 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. An investment manager by the name of Robert Kirby proposed in 1984 that investors could follow the same investing strategy. They identify a diversified portfolio of consistently performing companies, invest in their stocks and keep invested for at least 10 years.
In the Indian context, coffee can portfolio has been defined in the book “The Unusual Billionaires”. This book refers to companies which have generated Return on Capital (ROCE) over 15% every year. Also, revenue growth of more than 10% every year, over the last 10 years. Also, there is another famous book as ” Coffee Can Investing: The low risk road to stupendous wealth” written by Saurabh Mukherjea, Rakshit Ranjan, and Pranab Uniyal. Although, there are many books on investing only a few books have written about Indian equity markets.
Also, most of the Indian retail investors have been investing heavily in gold and real estate. However, over the past years, these investments have not benefitted from the economic rise. Moreover, coffee can invest can also help investors to save transaction costs in other forms of investment.
Why does it work in the US?
USA is a highly developed equities markets where close to 50% of individuals invest in mutual funds. An average individual maintains 10 times in mutual funds compared to savings bank accounts. A large amount of money being invested in the equity markets. Also, there is a sizeable number of large size public companies and widespread equity research. Hence, it has become difficult for fund managers to generate any superior returns (alpha) from active investing. Individuals are moving away to passively managed funds, index funds and coffee can investing to save on fund management expenses. Thus, coffee can investing has become popular in the US due to higher cost adjusted returns than mutual funds.
Read also about the Mutual Fund Investment Strategy
Why Mutual Funds are better than Coffee Can investing in India?
The following reasons why mutual funds are the best choice for long term investing and wealth creation in India:
1. Few quality companies: Only a few companies in India meet the coffee can criteria. Out of the top 50 companies in India by market capitalization (Nifty 50 constituents), only 4 namely ITC, Lupin Pharma, HCL Technologies and Asian Paints make the cut.
2. Likeliness for common investors to sell early: A portfolio of companies made with these criteria would have outperformed Sensex by 5%-10% in 15 years duration. During bear phases or long periods of stagnancy in a specific stock, most investors are likely to sell the non-performing or loss-making stocks. This beats the whole purpose of coffee can investing and reduces the overall returns. Hence, the actual returns derived from coffee can investing in Indian markets is lower than investing in equity mutual funds.
3. Outperformance delivered by equity mutual funds: In India, actively managed equity mutual funds have consistently beat their benchmarks by as much as 8–12% annualized returns compared to 5–7% from coffee can investing. E.g.,— a popular diversified equity investments portfolio had delivered 11% excess returns over its benchmark in the last 5y return and 8% returns since its inception 7 years ago. Thus, this approach has given meaningful returns and helped them for wealth creation over a period of time.
Also, one can use Scripbox’s mutual fund returns calculator to estimate their returns on investments.
Should you still do Coffee Can Investing?
Coffee can investing is a sound investing concept. However, an average investor can succeed with coffee can investing approach in real life because of investor bias and lack of financial expertise. Our view is that if coffee can investing really interests you, try it on 10% of your corpus. For the rest, investing in mutual funds remains the better choice.