Coffee Can Portfolio

A no-churn smallcase to buy & forget for 10 years

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The concept

The idea of a “coffee can portfolio” of stocks was first propagated in 1984 by a portfolio manager, Robert Kirby.  The concept was derived from the days of the old west in the early 19th century, when people put their valuable possession, like money and jewellery, in a coffee can and kept it under the mattress for safe keeping. Robert Kirby suggested that an investor create the best possible portfolio of diversified stocks, invest in the same and hold onto it without re-evaluating it or re-examining it for a period of at least 10 years. 

Why the buy-and-forget approach to investing is more effective than churning your portfolio

The advantages of investing in such a portfolio are:

  • Rising above the noiseInvestment in stocks requires a long term view, so that the intermittent volatility gets averaged out. However events like quarterly earnings misses, bad economic environment etc. affects us and based on these short term trends we incorrectly allocate funds. A “Coffee Can Portfolio” (CCP) protects us against this behavioural bias by forcing us to extend the time horizon, thereby amplifying the probability of generating positive returns
  • Improving upon index investing – One of the most common passive investment strategy is index investing. It involves buying the same securities and in the same proportion as an index, like Nifty. However one must remember that an index is a mere collection of stocks that provides a broad sample of a sector or an economy. This collection does not always include the best managed companies with the brightest prospects. A “Coffee Can Portfolio” allows’ us to select the stocks of well managed companies with the best growth prospects
  • Saving on transaction costs – One has to incur transaction costs in order to buy or sell stocks. Passive investment vehicles like Exchange Traded Funds (ETFs) also charge expense ratio which eats into the returns earned on the investment. A “Coffee Can Portfolio” allows us to minimize transaction costs which adds to the overall portfolio performance over the long term

Coffee Can Portfolio for India

Saurabh Mukherjea, CEO of institutional equities at Ambit Capital, in his book “The Unusual Billionaires” has explored the “Coffee Can Portfolio” strategy in an Indian context.  The stocks are screened on the basis of two filters:  

  • Revenue growth – Revenue is the economic engine that drives a company without which the company cannot earn profit. Constant revenue growth over the long term indicates that the company is able to expand its business operations and is growing
  • Return on Capital Employed (ROCE) – This ratio measures the company’s profitability and the efficiency with which its capital is employed.  Revenue growth creates shareholder value via stock price increases, only if ROCE remains high.  Hence it is a very important metric in assessing a firm’s performance

Read more on the CCP from Mukherjea here

The smallcase Coffee Can Portfolio

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smallcase’s coffee can portfolio has been with slight modifications to filters suggested by Saurabh Mukherjea. The criterion adopted here:

  • Revenue growth –   Companies whose revenue has grown by at least 10% every year for each of the last 10 years. In case of banks and financial institutions instead of revenue growth, net loan growth has been considered
  • Return on Capital Employed  Companies whose ROCE was at least 15% for each of the last 10 years have been selected. In case of ‘banks and financial institutions’, instead of ROCE, pre-tax Return on Equity of more than 20% for each of the last 10 years has been considered

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* Companies where 10 yrs history is not available, same criterion have been applied on the max available history. No company with a history of less than 5 years was considered.  

Data from financial year 2006 till 2016 has been used to filter companies. In line with Robert Kirby’s suggestion, the smallcase will not be rebalanced and should be ideally held till 2026.