Investing with a long-term horizon is generally considered a wise move. However, based on your risk appetite and financial goals, you may choose to invest in short and medium-term assets or opportunities. Not everyone can afford to buy and forget an asset to let it appreciate and gain value.
However, if you want to build wealth sustainably without making yourself vulnerable to high investment risks, perhaps coffee can investing could be the best way to go for you.
What is coffee can investing?
The term was coined by Robert G. Kirby in 1984 and refers to the age-old practice of saving (or hiding) valuable things in coffee cans by mid-western Americans. Coffee can investing essentially means investing in high-performing stocks and then holding on to them for a long period (10 years and beyond).
During this period, there is no need to follow the stock performance rigorously, trade them, or panic over their market price fluctuation. In essence, you buy the stocks and forget about them, as you would about money stashed away in an old coffee can.
What is a coffee can portfolio?
You need to identify multiple companies that are strong performers and invest in their stock to hold for the long term. These companies should be generating profits for a long period and be fundamentally strong. The resultant stock portfolio that you create is called a coffee can portfolio.
The biggest advantage of a coffee can portfolio is that it is low-risk and offers attractive returns over time without much active investing effort. At the same time, a possible disadvantage is that you may select some companies that may underperform and not gain any value, even after a decade. While such a portfolio requires minimal monitoring, it could also churn out low performers.
How to build a coffee can portfolio?
You can build a coffee can investing portfolio by following these simple steps:
- Start by identifying 10-12 top-performing companies and research their fundamental performance. Key indicators that you should look out for can be:
- The market capitalization should be more than Rs. 100 crores
- The companies should have been around for at least 10 years
- Year-on-year revenue growth of selected companies should be a minimum of 10%
- Return on Capital Employed should have been 15% or more
- The companies should have a strong brand presence and market share
- Use stock screener tools to identify companies that could be a good fit for your coffee can portfolio.
- Invest in mutual funds via Systematic Investment Plan (SIP) to make the most of the compounding effect as your selected stocks gain value over the years.
- Invest during dips or market lows, when your selected stocks may be available at a relatively low price.
- Diversify your stock selection and don’t limit your investment to just one or two sectors. This way, you will minimize your risk and over a long period gain from the growth in different sectors.
In conclusion, coffee can investing is a great way to build wealth without becoming too involved in the process. Choose the strongest market players to invest in and let your money grow over the years with a coffee can portfolio.