How to build a Coffee Can Portfolio?
Investing is nothing but the art of creating wealth. One of the most famous and unique investing strategies is the Coffee Can Portfolio. The Coffee Can Portfolio is a long-term investment strategy that follows a buy-and-forget approach. It is known for decent inflation-adjusted return over the longer horizon. By investing in stocks, you can become wealthy, but only when you adhere to intelligent investing principles.
The Coffee Can Portfolio strategy requires investors to buy shares and wait patiently for a few years to receive returns. Investing in the right companies and diversifying investments lowers risk for them. By the end of several years, they will have at least a few stocks that have outperformed. These stocks will give a high return on investment.
Most famous investors consider the Coffee Can Portfolio to be the best strategy for acquiring immense wealth.
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How did Coffee Can Portfolio get its name?
The Old West Americans had the habit of saving valuable things like money and gold in coffee cans, which they stored for years. The same strategy applies to the coffee can portfolio. An investment manager named Robert G. Kirby coined the phrase Coffee Can Portfolio in 1984. In the Indian context, the book “The unusual billionaires” by Saurab Mukherjea introduced the concept of the Coffee Can Portfolio.
Coffee Can investment types
Lump-sum
A lump-sum investment is nothing but investing a large amount of money in one or a few shots. Investments do not involve using longer separate segments of cash. It is usually the best choice for investors who hold enough money in hand. This type of investment strategy incorporates investing once or twice a year. However, the Lump Sum investment strategy is quite a risker for short-term market volatility. It’s better suited to investors who have experience and enough knowledge about markets and timings.
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SIP (Systematic Investment plan)
The systematic investment plan is the opposite of lump-sum investments. Here the money is broken down into multiple installments and invested in segments. It is the safest mode of investment, especially for beginners. Investors who are starting out or just learning the market can make investments using this method. Market volatility does not impact SIP mode investments as there exists purchasing of stocks throughout various market sessions.
Buy on dip
A fall in the price of a good stock is called a dip. Investors can buy stocks when the price of a stock falls. It will benefit investors when the price again rebounds.
How to Build a Coffee Can portfolio?
Stock market investing is not as easy as we may think. It can turn a person into a millionaire but also return unimaginable losses. So, there is a risk associated with it. But learning about the market and spotting good stocks can allow us to progress in our investment endeavors.
In the long run, long-term investments such as Coffee Can Portfolio can work out for you. We know that compounding is one of the pillars of this strategy.
Before investing, there are some parameters you should consider
- An essential part of a Coffee Can Portfolio is deciding which stocks to invest in for healthy returns. It means that one needs to perform a background check on the companies.
- Choose companies with a history of outstanding financial performance and market dominance of at least ten years.
- It is better to diversify the investments in multiple stocks rather than concentrating on one. Focusing on only one type of stock will increase the risk.
You can build a coffee can portfolio by following the steps listed below
- ROCE is the Return on Capital Employed, a ratio that measures the financial performance of a company. In the past ten years, the company’s ROCE should be above the cost of capital in the market. ROCE of >15% is considered a good one for ten years.
- You have to track the years of existence of a company. If the company has been present for more than ten years, it makes sense to invest.
- If a company has a negative cash flow from operations, investing is not a wise decision.
- ROE or Return on Equity determines the profitability of a company concerning the equity of the shareholders. ROE of>16% for a company is considered a good option for ten years. The average of five years of ROE is> 18%, and an average of 3 years of ROE is>20%. We need some consistent compounders those CAGR > 15% over a few years for making a Coffee Can Portfolio.
- Market Capitalization: A market capitalization of a company is also known as its market cap. It describes the value of shares of its stock in terms of dollars. The companies with a market capitalization of over 3000 crores are ideal for creating a coffee can portfolio.
- The company should have a dividend yield > 1%. On average, a dividend yield of 2% to 6% is considered a good one. The primary reason for choosing good dividend-paying stocks is, those companies that are paying good dividends are likely to be earning profits. In case your stock doesn't rise much, still you can have some income from dividends.
- The debt to equity of the company should be < 1%. A ratio higher than this becomes riskier.
- Sales growth: It is the increment in sales of a company for a certain period. The company should have a sales growth of> 10% to become a good choice of investment.
- The company should have a popular brand value and a competitive edge.
- A coffee can portfolio screener will help you build a coffee can portfolio.
- Choose stocks from multiple sectors. Allocation of more than 25% under a single section is not recommended for a Coffee Can Portfolio unless you are very confident.
Also, read How RBI's Retail-Direct Scheme Can be Beneficial for Retail Investors
Benefits of Coffee Can Portfolio
- A long-term investment strategy is better suited to people who lack time to monitor their investments regularly. It does not involve active participation in the markets.
- It is also suitable if people have a large amount of money and are waiting to invest in something worthy. Maybe, they might get a high profit in real estate and are looking to reinvest their profit. They will certainly look for another profitable approach that can multiply their gained returns.
- Investing in stocks for the long term will enable compounding to multiply your money to large amounts. Compounding is nothing but the ability of the invested amount to increase in value as time passes. Investing long-term will yield a reasonable return if you wait.
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Downsides of Coffee Can Portfolio
- Having a Coffee Can Portfolio also comes with its downsides. Individuals often have difficulty waiting for prolonged periods. Everyone wants to have their results right away. Most investors are so engrossed in the short-term gains that they neglect to appreciate the long-term benefits.
- Coffee Can Portfolio investments risk investing in low-quality stocks and waiting years to get good returns. The strategy is primarily about picking quality stocks. You can expect returns only if you invest in the right kind of stocks.
- Suppose you have already invested in long-term stocks. New industries will enter into the markets. If these industries begin to perform better than old industries, they can also replace the old ones. It increases the risk of stock performance getting lower.
- Investing in long-term stocks requires a lot of research, reading, and analysis. You may also go on the wrong path with a lack of research.
Final thoughts!
The Coffee Can Portfolio, if built with patience and intelligence, can accumulate wealth beyond your expectations. It is a good choice for those who are willing to wait patiently for more than ten years.