Coffee Can Portfolio - Week 0

Coffee can investing comes to India

The above is a simple coffee can portfolio that we have created with a corpus of INR 100,000. Before we get into the specifics for selection of each company, let's discuss the concept of coffee can investing.

Coffee Can Investing

Capital Group Fund Manager, Robert Kirby, narrated an incident involving his client’s husband. The man had purchased stocks recommended by Kirby but, unlike Kirby, did not sell anything from the portfolio. This process (of buying when Kirby bought but not selling thereafter) led to enormous wealth creation for the client over a period of about ten years. The wealth creation was mainly on account of one position transforming to a jumbo holding worth over US$800,000, which came from a zillion shares of Xerox.

And thus, the coffee can investing model was born - akin to leaving your investments untouched for a large period of time in a "coffee can".

In India, Saurabh Mukherjea is a key proponent of coffee can investing in his book "Coffee Can Investing". He sets up 2 simple criteria for picking his portfolio - Return on Capital of 15% and Revenue Growth of 10% year-on-year for the last 10 years. It's a really good read with back tested models and thorough analysis. We won't really get into the specifics here but feel free to read his book.

Our Coffee Can Portfolio

Corpus: INR 96,850 (approx)

Aim: To achieve a returns of at least 15% per annum.

Time Horizon: 10 years

Expected Corpus after 10 years: INR 391,812 (i.e. 305% returns)

The idea here is to treat your portfolio as a Fixed Deposit for 10 years. It is very difficult to keep a portfolio untouched especially when stock prices fall. It might be even harder when prices are rising and the urge to book profits kick in. However, we are going to resist this urge.

Warren Buffett also refers to a method where they hold shares for their lifetime. They do not believe in selling companies that are making profits, rather they hold onto companies that make losses. This results in exponential gains in the long run.

Peter Thiel in his book Zero to One talks about the Pareto Principle, conceptualized by Italian economist Vilfredo Pareto, which says that 80 per cent of the effects come from 20 per cent of the causes. In the investment management paradigm, what it essentially implies is that a few companies in the portfolio attain exponentially greater value than all the others when held for a long duration. Accordingly, we will continue to let our portfolio remain untouched even if the value of a company is going to become zero.

We will post weekly updates on the value of our coffee can portfolio all the way from week 0 to week 520. Our corpus shall be close to INR 1 lakh to show that this can be achieved with a small portfolio as well (however, obviously, this can be done with significantly larger portfolios).

Now, let's get to the specifics of the portfolio:

Note: You may notice that these are not the current stock prices for any of these shares. While we do advocate not trying to time the market, it would be foolish to invest when a fall is expected. However, you will also notice that the stock prices we've considered are not ridiculously low and are based on a small expected drop.

We'll keep on updating the above numbers as we make the actual investments in the coffee can portfolio. Stay tuned for Week 1.

Update: Read our week 1 update here

We'll detail our investment in each company and rationale behind it in a separate blog post later this week. We'll provide a link to the same in this post itself.