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Different individuals use different investing approaches to maximise their profits in the stock market. One such technique is the coffee can portfolio which is a buy and forget investment approach. The investors invest in high-performing shares and leave them like that for a while.
In this article, we will discuss what is coffee can portfolio, its functioning and its investment procedure.
What is coffee can portfolio?
The investment made in companies that have been performing well and forgetting them for a long time is known as the coffee can portfolio. These companies perform well and require relatively less monitoring. The people who go for coffee can build a portfolio of diverse stock investments of high-performing companies, and hold it for at least 10 years.
This is a long-term strategy in which you will notice that a few stocks will not grow in value, and others might lose value, but some will increase in value, which will provide a high return on investment.
History of coffee can portfolio
The term coffee can portfolio was coined by Robert G. Kirby in the year 1984. The name comes from a tradition in Old West America where before the banking systems, people used coffee cans to store their most precious items and hid them under mattresses.
The coffee can investing portfolio works on a similar logic where people buy high-performing shares and forget them for a long period, just like they did coffee cans.
Coffee can portfolio in the Indian market
Let us now contextualise the coffee can portfolio in the Indian market. The spread of the coffee can portfolio technique of investment in the Indian market originated from a book written on this topic. Saurabh Mukherjea’s “The Unusual Billionaires,” with coauthors Rakshit Rajan and Pranab Uniyal, made this investment strategy popular.
The book defines this investment strategy in the Indian context and also states examples of companies that have gained a Return on Capital (ROCE) of about 15% per year with this strategy. The book presents coffee can portfolio India as a low-risk strategy for making good profits in the long run.
How to build a coffee can portfolio?
With an understanding of the basic concept of coffee can investing strategy, let us now understand how is it executed.
Long-term investment strategies help the investors benefit from the compounding and also get dividends on their holdings. At the heart of this investment strategy is the quality of the stock. You must ensure that the stock you choose to invest in has an excellent past record and is a renowned company. Some factors that can help you make this decision include:
- The company must be in operation for over 10 years
- The minimum revenue growth should be at least 10% year-on-year
- Minimum ROCE of 15% for 10 years
- The market capitalisation of the company must be over 100 crores
- The market reputation and the brand value of the company should be excellent
- There should be some competitive edge to the company
While these are important markers, you can also use the coffee can portfolio screener to check the investment you are making.
Investment in coffee can portfolio
Finally, let us look at different ways in which you can invest in a coffee can portfolio. The different methods include:
The first way is to invest in a lump sum, which can give investors a good profit. These investments can be made twice a year. You can use bonus amounts or profits made through real estate or business investments to make this lump sum payment.
In case the lump sum payment option is not viable for you, choose to make this investment in monthly instalments known as SIPs.
The last way to make this investment is to buy on dips. It involves buying an asset when its price has dropped with the aspiration that the price will increase in the future. You can use this method to either buy a new asset or smooth an existing asset.
Lastly, keep in mind that the investment being made with this strategy should be as diverse as possible. This way, even if one or two companies do not perform as expected, the other companies might still perform well. It is a good strategy but must be carried out with caution because these are long-term investments that you buy and forget.
Benefits of coffee can portfolio
There are different benefits of the coffee can portfolio, including:
- Investors can capture the full potential of an investment and gain long-term gains from it.
- There is no short-term market volatility risk, and the investments come with reduced risk.
- There is minimal trading and management fee involved in this strategy, which makes it low cost.
- It is a relatively simple strategy without the need to monitor or adjust the investment.
Conclusion
The coffee can portfolio is best suited for individuals who are looking for long-term investment opportunities. People who want a passive investment option and can hold the money for at least 10 years must opt for this type of portfolio.
However, it is important to thoroughly evaluate the company you invest in based on factors such as its profit history and market reputation for future growth. Read more such financial concepts on StockGro.
FAQs
A coffee can portfolio is a type of long-term investment where investors invest in high-performing companies for a minimum of 10 years. It is a passive investment built on the ideology of buy and forget.
Coffee can investing was coined by Robert G. Kirby in 1984. It is based on the old Western American tradition where people kept their most precious items in coffee cans and slid them under mattresses before the banking system came into being.
The company must be in operation for at least 10 years, have revenue growth of a minimum of 10% year on year, have a ROCE of a minimum of 15% for 10 years, and have a good reputation and a market capitalisation of at least 100 crores.
You can invest in a coffee can portfolio as a lump sum investment or in a systematic investment plan. Lastly, another way to buy it includes buying on dips, i.e., when the cost of the shares falls for a while, and you expect them to rise in the future.
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