Coffee Can Investing — Meaning, Benefits & How It Works

23 Feb 2022|

2 min read |

by ICICI Securities Team

Introduction to Coffee Can Investing

As a stock market investor, you must have come across stories of wealth creation, where an investor purchases a stock at a specific price and then forgets about it for decades, only to discover later that his investment had turned into millions. And you might have harboured thoughts of creating your wealth using a similar technique.

If you invest your money in fundamentally strong stocks and hold them for several years, there are high chances you may end up with multi-bagger returns—for instance, Rs. 10,000 invested in Wipro’s shares in 1980 would have grown into Rs. 1200 crores today.

This strategy of buying and holding a share for a very long period is known as coffee can investing. Let’s learn about this term in detail and understand how you can use it to create substantial wealth.

What Is Coffee Can Investing?

As evident from the above example, coffee can investing refers to the “buy and forget” approach to investing in the stock markets. It is a low-risk method to create enormous wealth by buying a particular stock quantity at a specific price and then holding them for at least ten years to generate high returns.

Primarily, coffee can investing is a long-term investment strategy suitable for passive investors with an investment horizon of more than a decade.

Also Read: What is Long Term Capital Gain?

Origin of the Coffee Can Investing Strategy

Coffee can investing is a concept that originated in the US, where it is very popular. This term was first coined by an American investment manager – Robert G. Kirby – in 1984. In old West America, people used to hide their valuables in coffee cans and then placed them under their mattresses, where they stayed for decades.

Similarly, investors can choose to buy high-performing equity stocks and forget them for a lengthy period. This strategy can provide very high returns but selecting the right stocks is essential.

Also Read: Why is Investing Important and Where Should One Invest

In India, investors have practised coffee can investing in commodities like gold, real estate, etc., for a very long time. However, now they have started doing this with stocks as well.

Advantages and Drawbacks of Coffee Can Investing

The coffee can investing strategy tends to provide very high returns in the long term. But it can be equally risky as well. Let’s look at the drawbacks and advantages of using this strategy:

Advantages

This strategy allows you to create sustainable wealth with a holistic approach rather than short-term gambling

You don’t incur any extra charges, such as brokerage fees, taxes, and transaction costs

Since there is no need to monitor your investment portfolio continuously, it saves your time and efforts

Short-term volatility and market fluctuations don’t affect your investor sentiments

Your investments get multiplied over the years due to the magic of compounding

Disadvantages

It’s very crucial to choose the right stocks else you could even lose your money. However, It is challenging to select stocks for decades in today's dynamic world.

Not all stocks become multi-baggers in the long run

Socio-economic factors and regulatory changes can impact your portfolio’s performance

You will miss an opportunity to exit your investments even during highly bullish markets

How to Create a Coffee Can Portfolio

Below is a 4-step framework to build your coffee can portfolio:

Create a well-diversified portfolio of at least 15 to 20 stocks of fundamentally strong companies. Research well before selecting your stocks. Remember, coffee can have limited space, so your portfolio should also have a limited number of stocks.
Hold your portfolio for at least 10 years. Don’t allow the market volatility to impact your sentiments
If required, monitor and rebalance your portfolio (not more than once a year)
While some stocks will fizzle out, some stocks will provide three-digit returns, outweighing the losses

The Final Words on Coffee Can Investing

Coffee can investing is suitable for passive investors who wish to create substantial wealth and hold their investments for at least ten years. However, it’s crucial to develop a diligent portfolio that can deliver multi-bagger returns in the long run. Also, make sure to diversify your portfolio by owning stocks from different companies belonging to various industries.

Disclaimer

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