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What is Coffee Can Investing?

Introduction

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? 

From where did this term come from?

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.

Drawbacks and advantages 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:

  1. 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.
  2. Hold your portfolio for at least 10 years. Don’t allow the market volatility to impact your sentiments
  3. If required, monitor and rebalance your portfolio (not more than once a year)
  4. While some stocks will fizzle out, some stocks will provide three-digit returns, outweighing the losses

The final words

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 – ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is a Member of National Stock Exchange of India Ltd (Member Code :07730), BSE Ltd (Member Code :103) and Member of Multi Commodity Exchange of India Ltd. (Member Code: 56250) and having SEBI registration no. INZ000183631. Name of the Compliance officer (broking): Mr. Anoop Goyal, Contact number: 022-40701000, E-mail address: complianceofficer@icicisecurities.com. Investment in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investors should consult their financial advisers whether the product is suitable for them before taking any decision. The contents herein mentioned are solely for informational and educational purpose.

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