“I try to invest in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.” ―
Coffee Can Investment Strategy involves buying and holding a portfolio of high-quality companies for the long-term, typically ten years or more. The strategy is based on the premise that investing in the right high-quality companies will result in significant capital appreciation over time.
The concept was popularized in India by Saurabh Mukherjea in his book “ Coffee Can Investing: The Low-Risk Route to Stupendous Wealth”.
In this strategy, investors pick a group of high-quality companies with a proven track record of generating consistent profits, revenue growth and return on invested capital (ROIC). The chosen equity stocks are held for an extended period irrespective of market conditions or short term volatility.
This strategy allows investors to avoid the temptation of selling their equity holdings during short-term market volatility. It protect the investor from their own bad decision and investing behavior.
You only need one of the Coffee Can companies to hit and become a 100 bagger.
But, how to look at a small cap company and know that they have a runway.
Look at the ownership and use your imagination to determine if a company can have organic growth and expand into other markets.
At the end of 10 years, you will have some stocks that have not grown, others that have lost value, and two to four outperformers. Those outperformers will provide a high return on investment.
It refers to companies that have generated a Return on Invested Capital (ROIC) of over 15% every year with the Coffee Can Investing approach. This makes the approach a low-risk route to making stupendous wealth.
Coffee Can Portfolio is mostly concerned with stock quality. As an investor, you must choose a quality stock, which signifies a fundamentally strong company. Here are some points to build a Coffee Can Portfolio.
- The company should have been in existence for at least 10 years.
- The revenue growth should be at least 10% year per year.
- ROIC of at least 15% for 10 years
- Market capitalization should be more than $500 million USD
- The company should have good brand value.
- The company should have a competitive edge.
- Founder or CEO has skin in the game focused on driving value in the business. Executive management is strong.
For instance, let’s take an example of a toothpaste company. If a toothpaste company’s prices are increased, will people stop brushing? The answer is “NO.” Similarly, this strategy neither works on quantity nor growth; it works on quality investing.
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