- Date : 25/12/2022
- Read: 3 mins
An understanding of coffee can investing with a comparison with mutual funds
Robert G Kirby, an investment manager in 1984 came up with the idea of coffee can investing. The term itself is a reference to the days of the old when Americans would store their valuables and important documents in coffee cans. These coffee cans are then tucked under the bed or even under the earth, for decades and even generations. Kirby thought that this buy and forget approach could be applied to a bunch of reliable companies. Coffee can investing has been an investment strategy in the USA since then, and gradually in the rest of the world too.
So, what is Coffee Can Investing?
Quite simply, coffee can investing is all about selecting highly consistent companies and holding them as long term investments.
Also Read: What should be your investment strategy amidst rising interest rates
When is Coffee Can investing a good choice?
Much has been discussed about coffee can investing in India, including in Saurabh Mukherjea’s book on coffee can investing, co-authored with Rakshit Rajan and Pranab Uniyal. To start a coffee can portfolio you will need to look at companies with annual revenue growth of 10%, yearly return on equity (ROE) and return on capital employed (ROCE) of over 15%.
It is a strategy that can be considered in countries like the USA where active investing is not very productive. There is a large percentage of public money invested in the equity market, and equity research is at a significantly matured stage. There are many large companies in the market for investors to choose from. As a result, investors prefer to go for index funds or coffee can portfolios, while fund managers struggle to beat the market growth rate.
Besides, by not reshuffling your portfolio frequently, you will save money on brokerage and other taxes and charges.
Also Read: Follow these 4 steps to stay ahead in the financial markets
Is Coffee Can investing Better Than Mutual Funds?
One of the reasons why investors would prefer the active management of mutual funds over the buy-and-forget approach of coffee can investing is the possibility of market disruptions. Fund managers monitor the market dynamics regularly and can bail out your money in time before a disruptive technology hits your stocks.
These fund managers can also protect your wealth if any government regulations begin to pose a threat to your portfolio. If you tuck away your coffee can portfolio and one of the stocks undergoes a management change, your portfolio risk would increase. A fund manager would monitor such developments and monitor such companies regularly till the management stabilizes.
Also Read: Should you invest in mutual fund NFOs
Besides, there are not many companies in India that qualify for the steep benchmarks of a coffee can portfolio. Even within the Nifty50 index, not many companies qualify for the consistent ROCE of 15%+. Taking all of this into consideration, the coffee can investing approach can make your portfolio prone to market dynamics. Therefore, don’t disregard mutual funds completely and keep coffee can investing as a small portion of your portfolio.
Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.
Source:
https://scripbox.com/mf/coffee-can-investing-better-mutual-funds-india/
https://www.5paisa.com/news/heres-a-selection-of-buy-and-forget-coffee-can-investing-strategy-stocks
Robert G Kirby, an investment manager in 1984 came up with the idea of coffee can investing. The term itself is a reference to the days of the old when Americans would store their valuables and important documents in coffee cans. These coffee cans are then tucked under the bed or even under the earth, for decades and even generations. Kirby thought that this buy and forget approach could be applied to a bunch of reliable companies. Coffee can investing has been an investment strategy in the USA since then, and gradually in the rest of the world too.
So, what is Coffee Can Investing?
Quite simply, coffee can investing is all about selecting highly consistent companies and holding them as long term investments.
Also Read: What should be your investment strategy amidst rising interest rates
When is Coffee Can investing a good choice?
Much has been discussed about coffee can investing in India, including in Saurabh Mukherjea’s book on coffee can investing, co-authored with Rakshit Rajan and Pranab Uniyal. To start a coffee can portfolio you will need to look at companies with annual revenue growth of 10%, yearly return on equity (ROE) and return on capital employed (ROCE) of over 15%.
It is a strategy that can be considered in countries like the USA where active investing is not very productive. There is a large percentage of public money invested in the equity market, and equity research is at a significantly matured stage. There are many large companies in the market for investors to choose from. As a result, investors prefer to go for index funds or coffee can portfolios, while fund managers struggle to beat the market growth rate.
Besides, by not reshuffling your portfolio frequently, you will save money on brokerage and other taxes and charges.
Also Read: Follow these 4 steps to stay ahead in the financial markets
Is Coffee Can investing Better Than Mutual Funds?
One of the reasons why investors would prefer the active management of mutual funds over the buy-and-forget approach of coffee can investing is the possibility of market disruptions. Fund managers monitor the market dynamics regularly and can bail out your money in time before a disruptive technology hits your stocks.
These fund managers can also protect your wealth if any government regulations begin to pose a threat to your portfolio. If you tuck away your coffee can portfolio and one of the stocks undergoes a management change, your portfolio risk would increase. A fund manager would monitor such developments and monitor such companies regularly till the management stabilizes.
Also Read: Should you invest in mutual fund NFOs
Besides, there are not many companies in India that qualify for the steep benchmarks of a coffee can portfolio. Even within the Nifty50 index, not many companies qualify for the consistent ROCE of 15%+. Taking all of this into consideration, the coffee can investing approach can make your portfolio prone to market dynamics. Therefore, don’t disregard mutual funds completely and keep coffee can investing as a small portion of your portfolio.
Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.
Source:
https://scripbox.com/mf/coffee-can-investing-better-mutual-funds-india/
https://www.5paisa.com/news/heres-a-selection-of-buy-and-forget-coffee-can-investing-strategy-stocks
