A Take on 'Coffee Can Investing'

An uninspiringly named yet powerful investment approach

While not everyone may be a coffee drinker, most can agree that a well-brewed cup of coffee—as simple as it may be—can be crucial to a person’s day.

Whether a mood-lifter in the morning or a mind-sharpener to get your head straight, to that much needed escape to be alone with your thoughts, or even over a conversation to fuel the soul.

There are but a few things that compare to the humble yet colloquial “cup of coffee” and what it has enabled for human society.

That dose of caffeine that induces boosts in productivity and moments of clarity has consistently contributed to a countless number of insights and breakthroughs through the ages.

And let’s not forget the mesmerizing aroma that can put your mind at ease as you look forward to a brighter day.

And on that note, I’m not sure about you, but with all the amazing—and even sensual—things that we can say about coffee and the parallels we can draw to the investment approach that is the topic of this article, how in the world did we end up with such drab names like the Coffee Can Portfolio or Coffee Can Investing?

A very brief history and rundown

The “Coffee Can Portfolio” (CCP) gets its moniker from the days of old when people would stash their valuables and savings in coffee cans (allegedly) and leave them under their mattresses or somewhere safe in case of a rainy day.

The term was coined by Robert Kirby, a fund manager back in the '80s, when he realized that one of his long-time clients had only ever followed his buy recommendations but not his recommendations to sell.

That is, he stashed his investments and never sold them.

This left his client with an odd-looking portfolio that included many poor investments but also a few positions that had more than offset those losses with an overall return that ended up being even better than Kirby’s own portfolio.

The merits of this approach I think can be far better explained and highlighted in an illuminating piece by

Market Sentiment

which can be read here. I also highly recommend checking out their other articles; all of them are fascinating reads.

In essence, it is a long-term equity “buy and hold” strategy that rewards patience from picking and sticking with “low-risk” stocks and funds over long periods of time.

And by “low-risk,” high-quality company stocks and market-indexed funds are ideal candidates for such a portfolio.

These usually include companies that command a number of competitive advantages over their competitors that allow them to protect their profits and market share. They may also operate in industries where scale economies are inherent, allowing for accelerated revenue and profit growth. And obviously, these are businesses that have a history of strong leadership and management, and a track record of high returns on their invested capital over time.

When looking at funds, these typically include index funds that track stock market indices that are diversified in terms of the companies listed at various market capitalizations, across a range of sectors and industries, and even across different geographies.

There are many well-known companies and funds that meet these criteria. Since these investments will be held for a long time, it's important to do enough research to make sure that they meet as many of these requirements as possible and also fit your needs and financial situation. This is key for the strategy to work and to give you peace of mind.

It goes without saying, however, that nothing is guaranteed when investing in financial markets. Past performance is not necessarily an indicator of future gains.

But the strength in this approach comes from the fact that the stock market has historically performed better over time relative to other investment assets. This in turn has returned a lot of wealth to investors, with high-quality companies usually leading the way. 

And while picking the right stock or fund should never be taken lightly, we can take solace in knowing that most active fund managers tend to underperform the market the longer the investment time horizon.

My take on it

Funnily enough, I only realized that this strategy had a name fairly recently. 

On the one hand, my blatant ignorance likely played a role in this, and I should have known better. But as a retail investor, I’ve always been more risk-averse and therefore leaned towards more passive forms of investing that naturally take a longer-term view.

This is similar to the CCP approach. As a result, I guess I spent more time researching other forms of investing to expand my horizons instead of going deeper into the world of “buy and hold.”

As much as I would like to be able to say that I can isolate the signals from the noise that we see every day, week, and month across financial markets and in the news, my track record is more likely to show that my biggest returns have come from being patient with safe picks and my heaviest losses have come from getting caught up in the noise.

And it’s so easy to get caught up in the noise.

The challenge with the coffee can approach, and long-term investing at large, is the fact that you need to be patient and comfortable with doing nothing. Even when everything around you seems to be heading in a different direction, you still do nothing. 

And here’s a misconception I tend to see from time to time: that “buy and hold” literally involves doing nothing and therefore is boring.

Let’s clear that up a bit.

By doing nothing, it just means ignoring the hype, but there is a plan. It may involve extended periods of no investment activity, but you still continue to research and stay up-to-date, waiting for the right opportunity to come along that fulfills your criteria.

But keep in mind that the approach isn’t static either. Just because you set out to only invest in high-quality stocks or funds doesn’t mean you'll only invest that one time or that you won’t make mistakes. 

In my opinion, you can and should make adjustments as needed, especially as market signals eventually become more distinguishable from the noise.

So what does this actually mean?

Sometimes the right investment choice can be made at the wrong time. The market can be a pain that way. One way to mitigate this is by continuing to invest in the asset to try and bring your average cost per share (or cost base) down.

That is, if you still feel strongly about an investment choice based on your research despite the short-term return going the other way, you should consider buying more at a lower price. This would bring your cost base down and potentially increase your overall return down the line.

A more systematic way of doing this is referred to as the “Constant-Dollar Plan” or “Dollar-Cost Averaging” (DCA), where a specific amount is invested at regular, fixed intervals. This can be effective in not only bringing down your cost base but also reducing the impact of market volatility on your investments.

In effect, you’re cutting through the noise, so to speak, by continuing to invest through up and down periods over time and therefore mitigating the effects of poorly timed investments.

This can be a very effective method for newer investors or investors who don’t want to (or are unable to) manage their portfolios more actively.

You may also come to find that some of your investments just aren’t panning out the way you had hoped or that some are performing far better than others.

In this case, you might want to consider focusing on your strong performers by shifting future investments and reinvestments (from dividends) towards them.

This has the risk of potentially skewing your portfolio and having “too many eggs in one basket,” but if you’re continuing to research and identify new high-quality investments, it should help balance this out over time.

Final thoughts

We’d all love to be able to have the foresight to know what’s around the corner and be able to time the markets, but let’s not get ahead of ourselves. 

We should be very wary of anyone who claims to be able to do this.

Instead, as simple as it may sound, consider the time-tested method of doing the research, picking companies and funds with strong track records, and continuing to invest in them at regular intervals.

And while everyone’s circumstance is different, this by no means should be your only investment approach. There are other strategies out there that can help balance out your portfolio to hedge against uncertain market conditions (e.g., fixed-income, commodities, etc.).

However, "buy and hold" strategies, such as coffee can investing, can provide some of the best opportunities for solid returns the longer your time horizon. They should be a part of your arsenal.

As they say (and apologies for the cheesiness): “It's not about timing the market, but about time in the market.”

See you in the next one!