How coffee can portfolio works for HNIs

A coffee can portfolio is a long-term bet on certain stocks that have extremely good promoter lineage, have consistently performed over the years, have a long runway for growth and are backed by good management to name a few.

The going theory is that such companies when held over a long period of time will create a lot of wealth for their shareholders. It has often been shown to be true.

Origins

The concept of coffee can investing originated with American gold miners who would store their valuable mining contracts in coffee cans beneath their mattresses as a symbol of commitment. They vowed not to sell their land or contracts until they struck gold.

While some miners, influenced by the excitement and temptation of quick riches, might trade their plots for what seemed like more promising opportunities, others remained steadfast in their commitment to their original claims. It was those who persevered, exploring the full potential of their mines, who ultimately discovered the gold.

In 1984, Robert Kirby coined the phrase coffee can investing phrase noting that, “as your most successful investments grow in value, you make partial sales and transfer the capital involved to your less successful investments that have gotten cheaper. The process results in a stream of capital being transferred from the most dynamic companies, which usually appear somewhat overvalued, to the least dynamic companies, which usually appear somewhat undervalued”.

His philosophy gained renewed traction in recent years after hedge fund manager Christopher Mayer's book, "100-baggers" noted that to make outsized returns and get the best out of compounding, stocks need to be held for around a decade.The stock selection should be focused on firms with owner-operators, original founders, small to mid-cap market capitalization and a strong return on invested capital.

The coffee can pitch typically underlines that companies generate a return on capital employed (ROCE) of over 15% every year to be counted as part of this elite club. The ratio tells you if the company is able to spew good profits from the capital it puts to use.

Warren Buffet

This kind of approach of buying and forgetting quality companies also often gets cited by those who follow the legendary investor Warren Buffet. Thousands of investors closely monitor Berkshire Hathaway's quarterly holdings. A key factor in Warren Buffett's immense wealth has been his long-term investment strategy. By holding soft drinks maker Coca-Cola and banking giant American Express for over three decades each, Buffett has benefited significantly from both capital gains and dividend income.

American Express has been held since 1994, and Buffett has a particular fondness for Coca-Cola, which he acquired in 1988 and often outlines the importance of holding quality companies for long.

"If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes," he said in his 1996 letter to Berkshire Hathaway shareholders.

As Buffett explains, if you had purchased one share of Coca-Cola at its IPO price of $40 in 1919 and reinvested the dividends, that single share would be worth approximately $18 million today. This remarkable growth reflects the power of long-term investing and the importance of focusing on the underlying value of a company rather than short-term market fluctuations.

As of 2024, Buffett owns Apple, Inc. (AAPL), Bank of America (BAC), American Express (AXP), Chevron (CVX), Coca-Cola (KO), Kraft Heinz (KHC) and Occidental Petroleum (OXY) among other privately held names. Bank of America, Apple, American Express, and Coca-Cola are some of his largest holdings.

India

In India the coffee can approach has become very popular over the past few years with high net worth individuals. This has been largely because of the simplicity of investment where key filters are imposed on companies before they are selected for concentrated bets. Data also shows that over long periods, such quality stocks have given higher returns compared to the Nifty 50 benchmark.

In many cases, it is indeed true. A story that often gets cited is the story of HDFC Bank. If someone had invested Rs 1 lakh in its Rs 9.82 share and held it for over 20 years this would have been worth over Rs 1.7 crore. Some of the popular coffee can stocks have given stellar returns in the past five years as well. Tata Consultancy Services (TCS) has given over 70% returns, Infosys over 110%, Pidilite Industries 150% etc. Similarly, Bajaj Finance tops the list of stocks that have given the highest returns over the last 20 years at 39.96% CAGR followed by JSW Steel at 39.78%, Ajanta Pharma at 39.16%, TTK Prestige at 38.72%, Aegis Logistics at 37.92%, Titan Company at 37.60% and Havells India at 37.51%.

Conclusion

Still, one has to be careful of what coffee can approach if one is impatient and prone to often comparing returns over a short time frame. For example, many of the so-called coffee can stocks, a paint stock which is battling new market competition, are often cited. They have not performed as well in the past three years and have often given single-digit returns leading to disappointments

Such outcomes can be time to make the life of the fund manager miserable when the portfolio is not even beating benchmark returns despite heavy portfolio fees but these are also the time to be patient. Three years is not enough of a timeframe to gauge the returns of such a concentrated high-quality stock portfolio. Some of these non-performing companies may have not met growth targets but could in the future and some may have been impacted by external factors like the Russia-Ukraine war, global disruptions and high interest rates which may not last forever.

If one combs the list of stocks tagged above with Bajaj Finance one may realize most of them are not part of the coffee can club but have given outside returns. Conversely, you can say the list is led by Bajaj Finance which was part of your coffee can portfolio and be happy that it has multiplied your wealth just like those gold miners of America.