The Coffee Can Mindset
Plus a Bitcoin Update
I am a big fan of the Coffee Can Portfolio, an “Active Passive” approach to investing. The idea is simple: You try to buy the best stocks you can and let them sit for years. You incur no costs with such a portfolio, and it is simple to manage.
I’ve shared Four Coffee Cans so far on my Performance Scorecard. Here is what their performance looks like so far.
Today, I’ll talk about the Coffee Can Mindset in the context of my second Coffee Can:
The Trade Desk (TTD) purchased for $256.77 on 12/16/2019.
MongoDB (MDB) purchased for $139.94 on 1/6/2020.
Etsy (ETSY) purchased for $44.69 on 1/6/2019.
Bitcoin (BTCUSD) purchased for an average price of $9,661.87 on 2/11/2020 (~half for $10,302.04 on 2/11/2020 and ~half for $9021.69 on 2/25/2020).
I view these as 3-5 year holdings, minimum.
Let’s start.
The Coffee Can Mindset
Here are 6 mental models I keep in mind when adding to my Virtual Coffee Can.
1. Think With Your Long Term Hat On.
Jeff Bezos, the world’s richest man, was once asked “what do you think is going to change most in the next 10 years?”
Jeff replied, "That's a good question. But a better question is: What's not going to change in the next 10-20 years?"
Covid has changed the world. However, in many ways nothing has changed. The long term trends benefitting the above investments (growth in programmatic advertising for the Trade Desk, cloud-native databases for MongoDB, artisan eCommerce for Etsy, and cryptocurrencies for Bitcoin) are still alive and well, and will likely be for years to come. It is through this type of lens that we must be looking, when filling up our Coffee Cans.
2. Be Willing To Buy More.
The Trade Desk, Etsy, and MongoDB were all purchased a second time. They are all companies from Coffee Can 1.
Don’t be afraid to buy the same stocks multiple times, especially when your conviction level goes up.
3. Don’t Be Afraid To Double Down.. Carefully.
MongoDB was bought at a 15% discount to the price paid in Coffee Can 1. This can be dangerous. In Private Markets, this is referred to as a “Down Round”, when an investment is made at a lower price compared to the past. That’s usually not a good sign. It means that the company was unable to convince the “smart money” to invest at a better price. Instead, the company had to become a “Price Taker” in order to get the deal done.
However, dynamics in public markets are different. Public markets are auction driven, and can easily fluctuate above or below “fair value”. As I’ve shown before, even the biggest companies in the world fluctuate ~40% in a year.
If the investment thesis hasn’t changed, yet the stock price is lower, it may be worth buying again.
I doubled down on MongoDB in January 2020. You can read my comments about the company in my Coffee Can 1 recap.
4. Get Used to Buying Up.
“If you believe a business is less risky than it once was, you should expect the price to be higher.”
The Trade Desk was purchased for a 35% premium compared to the TTD purchase price in Coffee Can 1, just a mere 3 months afterwards. As I developed more conviction in the business, I bought more, even though the price was higher. This is probably the most psychologically difficult aspect of Investing in Mavericks. But necessary.
Here is the original Trade Desk Investment Thesis, and here are brief comments about the company from my Coffee Can 1 recap.
5. Diversify! Diversify! Diversify!
This Coffee Can has just 4 investments in it. This is a bit too low for my liking. That said, since I didn’t mention other stocks on the Scorecard earlier, I will track this one with just 4 investments.
Normally, I would like to have at least 5-6 stocks minimum in each, especially considering the high-growth emerging businesses I gravitate towards. These types of investments tend to be pretty volatile. They need to be. After all, we are looking for companies with 10X potential.
6. Don’t Be Afraid To Invest In New Markets.
Most investors say to stay within your “Circle of Competence”. But remember, Investing in Mavericks is like investing in Venture Capital. As Public Market Venture Capitalists, we’re investing in innovation. We’re investing in the future. This likely means investing in new markets, new business models, and new ideas. By definition therefore, it is unlikely that new ideas are always within one’s Circle of Competence...at least not at the beginning.
So don’t be afraid to invest in new, large and growing markets.
Bitcoin is one such investment. Bitcoin isn’t a stock but it fits the profile of the types of investments I’m looking for.
A Bitcoin Update
Bitcoin was the 4th investment in our Coffee Can. Since the investment, there have been some very important developments:
1. The Price Crashed…But Rebounded In Just A Month.
People who were waiting for a price decline got what they wanted. More importantly, they actually bought the decline. The price has now rebounded to almost all time highs. Clearly this demonstrates strong demand for the cryptocurrency.
This is yet another example demonstrating Bitcoin’s resilience.
2. A Hedge Fund Stamp of Approval.
Earlier I had said that
“When a new technology emerges, if it is significantly better, cheaper, faster and more accessible, it eventually goes mainstream. Products, companies and industries emerge to commercialize it.”
I believe the mainstream-ing of Bitcoin is happening before our eyes. The below is but a small, yet important, step in that direction.
Billionaire Hedge Fund Manager, Paul Tudor Jones, recently started buying Bitcoin. Paul is a well respected investor, managing over $38 Billion, and he has now essentially put his “stamp of approval” on Bitcoin. Although Bitcoin represents only 1-2% of his assets, this is a meaningful development because it paves the way for other investment managers to take Bitcoin more seriously.
Here are a few interesting things Paul had to say about Bitcoin:
“It may end up being the best performer of all of [my holdings]. I kind of think it might be. I am very conservative. I am going to keep a tiny percentage of assets in it. It has not stood the test of time, for instance like gold has, which has been a store of value for 2500 years.”
—Paul Tudor Jones
Paul sees Bitcoin as an emerging store of value, a hedge against inflation. That said, he thinks Bitcoin hasn’t yet stood the test of time (fair observation). He believes that everyday that Bitcoin survives, trust in it goes up.
He believes that the digitization of the world will benefit Bitcoin. An interesting example is India, which explicitly moved towards digitization by banning large cash denominations.
Lastly, Paul mentioned that every asset that has experienced a bull market requires an ever-expanding universe of people who own it (see Billionaire Vanity - A Fun Thought Experiment). He estimates there are 55-75 million Bitcoin owners today, and by investing in Bitcoin, the bet you’re making is this number grows significantly.
I spoke about many of the above ideas and principles behind investing in Bitcoin here:
Check it out.
What’s Next?
I’ll write about some Coffee Can 3 companies with strong Flywheels/Network Effects (I’m thinking Pinterest or Docusign to start). Update: Why I Bought Pinterest (PINS)
I plan to write a series called Studying Winning Stocks. Update: Article on NVR, the 2001 Stock Pitch
I may share updates about some Options experiments I’ve been running.
A Request To You
If you enjoy my writing please tell at least 1 person about Playing For Doubles.
Also, let me know if there is anything in particular you’d like me to write about!