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7 Aug, 2024
5 mins read
One common excuse people often give for not actively participating in the stock market is their lack of time or expertise to monitor their investment portfolio closely. This is where the coffee can investing strategy becomes particularly valuable for such individuals. Simply pick your investments and let them grow over the long term. Have you heard about the coffee can investing? Dive into this blog to learn about it and how to create a coffee can investing portfolio.
The Coffee Can Investing Strategy is a simple, long-term investment approach where investors select high-quality stocks and hold onto them for a very long time, typically ten years or more, without churning the portfolio.
This approach is like putting your money in a "coffee can" and forgetting about it while trusting that these strong companies will grow over time. The coffee can investing concept originated in the 1980s in the United States. It was inspired by the old American practice of putting valuable items in a coffee can and keeping it safe for years.
This investment strategy involves focusing on fundamentally strong companies with good growth prospects and letting time work.
Saurabh Mukherjee's book Coffee Can Investing: The Low-Risk Road to Stupendous Wealth, explains this concept in detail.
The book provides practical advice and examples tailored to the Indian market. Mukherjee emphasises the importance of choosing the right companies and having the patience to allow investments to grow, making it an accessible guide for investors looking for a low-risk, high-reward approach to building substantial wealth over time.
The coffee can investing strategy is versatile and can apply to global or Indian markets. It involves selecting high-quality stocks with strong competitive advantages and sustainable business models. Investors should look for companies with consistent profits and revenue growth.
Investors should also consider diversifying their portfolio across various sectors and industries, as this is crucial to minimising risk and capturing opportunities from different market segments. Once the stocks are chosen, they should be held for an extended period, typically a decade or more, for this strategy to work effectively.
This strategy of holding investments for a long time helps investors avoid selling during market fluctuations, ensuring they take advantage of possible long-term profits. This strategy leverages the power of compounding and reduces the stress and costs associated with frequent trading.
A coffee can portfolio usually has key characteristics that make identifying and ensuring profitability easier. Here are a few of these critical characteristics of coffee can investing.
Long-term Investing Strategy: The coffee can investing strategy is a long-term investment strategy that is simple to understand and implement but also demands patience and discipline from investors.
Based on the Principles of Buy and Hold : This strategy can provide huge potential for substantial returns as the investments are left to grow undisturbed for at least a decade.
Promotes Diversification: Through the coffee can investing strategy, investors can reduce the overall investment risk by spreading investments across various sectors and industries, enabling them to capture opportunities from different market segments.
Focus on Fundamentally Strong Companies: This strategy focuses on investing in companies with strong fundamentals, such as consistent profits and growth opportunities, rather than short-term price movements.
Low Cost: This is a low-cost investment strategy, as minimal frequent trading is involved.
The coffee can investing strategy is based on investing in fundamentally strong companies with an excellent competitive edge in the market. The basis of selecting stocks for coffee can investing approach includes companies with the following traits,
The company should have been in existence for over ten years.
The Market Capitalization of the company should be more than Rs 100 crores
A minimum of 10% year-on-year profit growth.
Businesses with a high ROCE (Return on Capital Employed) of at least 15% in the past ten years.
Companies with a strong focus on sustainable competitive advantages and creating a strong brand for itself.
Building a coffee can portfolio involves key steps, from identifying the correct stocks to letting them grow over time. The step-by-step process to build a coffee can portfolio is explained hereunder,
Research the target companies that meet the above criteria.
Keep a small portfolio of about 10 stocks from different industries to diversify sufficiently.
Stay invested in the selected stocks for a long time without regular interference.
Coffee Can investing can seem like a straightforward approach, but it does come with its own set of challenges. Here is a brief list of them.
Investors need to back their investment choices with extensive research to select the right quality of stocks for their coffee-can portfolio, and this can be difficult, especially for novice investors.
The profitability of a coffee can investing portfolio relies on letting the investments grow and provide desired returns, which can be difficult for most investors who act impulsively in the face of market volatility or who look to make short-term gains.
Investors can face portfolio concentration risk if many of the portfolio's stocks come from the same or related sectors.
Coffee can portfolio is attractive to investors based on its various benefits. Some of them are.
Coffee Can Investing focuses on holding high-quality stocks for a long time, allowing investors to benefit from the companies' growth and the power of compounding.
Investors can enjoy reduced transaction and brokerage costs as the stocks are bought and held.
Long-term investments attract lower capital gains tax than short-term trades, which makes Coffee Can investing a tax-efficient option for investors.
Coffee Can investing is a simple strategy for investors to understand. It requires minimal or measured efforts and monitoring, making it accessible to all categories of investors.
Although coffee can investing has a new name, it is a traditional concept of creating a long-term investment portfolio. It is an attractive strategy for investors seeking a simple and practical approach to long-term wealth creation.
This strategy's basis is to find a few quality stocks and rely on them for capital appreciation in the long term.
The prime disadvantage of coffee can investing is the need for extensive research, the need to bet on quality stocks, the patience required to ignore short-term volatility, and the urge to capitalise on short-term gains.
The essential criteria for choosing stocks for coffee can investing is to look for companies with strong fundamentals coupled with parameters like high ROCE, minimum criteria for market capitalisation and a proven track record of at least ten years of profit growth.
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