Book Notes: Coffee Can Investing

Coffee Can Investing: The Low Risk Road to Stupendous Wealth authored by Saurabh Mukherjea, Rakshit Rajan, Pranab Uniyal originally published in 2018 revolves around the idea of Coffee Can Portfolio by Robert Kirby of Capital (American Investment Giant). It is an investment approach in which the investor buys stocks and forgets it for years. The term originated from the prebanks era of America where people used to store their saved valuables in a coffee can under a mattress.

The book takes us briefly through the Indian Investment history in a non boring manner. And peeks into all investment instruments and how we Indians embraced them.

Interesting Notes:

Stock market crash — between January and November of 2008 ( Nifty fell 55 per cent )

Real Estate slowdown — 2013 to 2017 ( Price correction in property )

Seven basic investment mistakes:

• No clear investment objective/plan
• Trading too much, too often
• Lack of diversification
• High commission and fee
• Chasing short-term returns
• Timing the market
• Ignoring inflation and taxes

For a saver looking to build up a corpus for the next twenty to thirty years, two to three years spurts in volatility do not matter.

Longer time horizon for investments = Higher investment portfolios equity exposure.

1720 — Newton owned shares in South Sea Company ( hottest stock in England )

He muttered that he ‘could calculate the motions of the heavenly bodies, but not the madness of the people’.

He sold his shares for 100 per cent profit ( £1000 )

months later — he invested again at a higher price and lost ( £20,000 )

( he left his emotions get the best of him )

Two simple questions for successful investing:

• Which stock should i buy?
• For how long should i hold the stock?

Incorrect Investment Theory (most common)

• to make higher returns from the stock market, one must take higher risks

Be a Investor not a Punter (who incorrectly thinks and call themselves investors)

An investment in knowledge pays the best interest — Benjamin Franklin

Long-term competitive advantage in a stable industry is what we seek in a business.

Warren Buffet likes to invest in companies that have:

• a business we understand
• favorable long-term economics
• able and trustworthy management
• a sensible price tag

On how long to hold:

• when we own portions of outstanding businesses with outstanding managements, our favorite holding position is forever.

It is hard for investors to leave a portfolio untouched for years.

Coffee Can Portfolio comes to India

• Straight-forward investment filters to identify ten to twenty-five high quality stocks and then leave the portfolio untouched for a decade.

Simple investment filters:

• minimum Market Capitalization of Rs100 Crore.
• grown Sales each year by 10 per cent.
• Return on Capital Employed of at least 10 per cent.

Return on Capital Employed (ROCE)

• A company deploys capital on assets, which in turn generate cash flow and profits.
• The higher the ROCE, the better is the comapny’s efficiency of capital deployment.

— 15 per cent is the bare minimum return required to beat the cost of capital.

Buffet’s three categorization of businesses based on Return on Capital:

• High earning business with low capital requirements — Example: Hindustan Unilever
• Business that require capital to grow and generate a decent ROCE — Example: HDFC
• Business that require capital but generate low return on capital — Example: Bharti Airtel

Beware of little expenses. A small leak will sink a great ship — Benjamin Franklin

Mutual Fund History

• believed to originate in Netherlands, in 1774. A Dutch Merchant named Adriaan van Ketwich pooled money from a number of subscribers and named it — Eendragt Maakt Magt (Unity Creates Strength)
• Massachusetts Investors Trust — The first modern day mutual fund was created in United States in 1924.
• Mutual Fund Industry in India was born in 1963 when the Unit Trust of India (UTI) was formed through an act of Parliament ( for almost 20 years was only entity offering mutual fund )
• 1993 — first private mutual fund entity — Kothari Pioneer (now Franklin Templeton)

ETF or Exchange Traded Fund

• Nifty ETF is a fund that invests in all the Nifty Fifty companies in the same proportion as they are in the Index. This ensures that the value of the fund moves exactly like Nifty.

Perfect Market:

• All buyers and sellers have exactly the same information

More than 30 per cent of India’s real estate sector is funded by black money.

A man who has committed a mistake and doesn’t correct it is committing another mistake — Confucius

Highlight of the book:

• Investing for long periods of time in high-quality portfolios
• with a higher weightage to high-quality small-cap companies
• while ensuring that you don’t pay too much by way of fees
• and avoiding investment traps like real estate and gold
• should lead to significant and sustainable wealth creation

Goals ( three categories ):

• Security — These are extremely important to us and provide protection from anxiety
• Stability — These goals are not as important as the security related goals. However they ensure that we maintain a desired standard of living.
• Ambitions — Not necessities — wealth mobility and status in social circle.

It is important to curb the propensity to keep checking your portfolio regularly.

Some people want it to happen, some wish it would happen, others make it happen — Michael Jordan