Coffee Can Investing - The 'Do Nothing' Strategy for Stock Market Fortunes

In 1978, my dad bought his first car, an Ambassador.

That car has been on more family holidays and is featured in more family photographs than I have.

Dad would have loved to pass his beloved car down the generations, but I had little interest in owning it.

Hiding his disappointment, he joked that at least he wasn't bequeathing me shares of the makers of Ambassador - Hindustan Motors.

Hindustan Motors was once a Sensex stock.

And now it's bust.

So, dad certainly showed foresight by not investing in it.

Whether a good product necessarily makes for a good stock, is a longstanding debate.

As an analyst, I am guilty of reminding you, that instead of buying a Royal Enfield bike, if you had used that money to buy the stock of its manufacturer, Eicher Motors in 2013, you could have been a multi-millionaire.

The stock had become a ten bagger by 2017.

Also, I remind people that buying the stock of HDFC in 2007 would have yielded more than buying real estate in any Indian metro city.

In 1984, a gentleman called Robert Kirby coined a term for such stocks. He gave them a catchy name: Coffee Can Portfolio:

These are stocks you can buy and seal away in a coffee can for a decade without ever having to take a second look.

But not every stock is a coffee can candidate.

The sturdy Ambassador, for one, was not able to keep the stock price evergreen.

It tells us that even a great product is not good enough to identify stocks for your lifetime.

Instead, you should buy businesses that can keep their products popular, with marginal innovation, all through your lifetime.

Warren Buffett did exactly that when he bought stocks of Coca Cola twice (in 1989 and 1994) at an average value of US 1.29 bn.

He did not see the company investing tons to innovate new drinks for decades.

But he did see the product holding its own throughout his lifetime.

The strategy paid off and how!

Between 1995 and 2019, Warren Buffett fetched unrealised gains of US$ 19.4 bn on the stock of Coca Cola. In terms of dividends, he earned another US$ 7 bn.

But neither the most popular stocks today, nor the cheapest, may be good candidates for the coffee can.

What makes a stock coffee can worthy, is when the company's products need little change to satisfy customers for a decade.

The Best Way to Identify Coffee Can stocks

Think of the toiletry, stationery, health drinks, apparel, electronic and pharma products that you used as a kid.

And are your kids still using the same brand now?

If some names come to mind, evaluate the quality of the business and its numbers.

If these are sound, then start filling your 'coffee can' with their stocks. If all goes well your kid might eventually love the product while also growing wealthy with its stock!

The makers of the Ambassador car, Hindustan Motors, unfortunately did not fit the 'coffee can' criteria.

The sturdy car may have served generations. The stock didn't.

Can Coffee Can Investing Make You a Crorepati?

Asian Paints multiplied 863 times in 30 years since 1991. A sum of Rs 100,000 in Asian Paints in 1991 would have turned into Rs 8.6 crores in 2021.

Pidilite has multiplied 440 times in 25 years since 1995. It would have turned Rs 1 lakh into Rs 4.4 crores in 2021.

HDFC Bank multiplied 354 times in 25 years since 1995. A sum of Rs 100,000 in HDFC Bank in 1995 would have turned into a whopping Rs 3.5 crores in 2021.

I can give innumerable such examples of Coffee Can stocks in India.

The key to creating a fortune with Coffee Can stocks is buying them when there are still some clouds of uncertainty hovering over them.

The uncertainties maybe with respect to macro challenges, businesses specific temporary risks, execution risks or balance sheet risks.

The best way to hedge against such risks is to take gradual exposures to the stocks. Doing so, will allow you to buy more of the stocks as your conviction in the businesses goes up.

As these businesses mature, overcome risks, diversify into high growth areas, or change their capital plans, you can always stagger your investment depending on your comfort.

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