The Coffee Can Portfolio

An Active Passive Approach

Investing is a long term game. 

However, investors today increasingly focus on day to day, month to month, or quarter to quarter investment returns. This is a big deterrent to good investment results. That’s why, even though I buy individual stocks, I prefer holding them for long periods of time. This is an “active passive” approach. This is what the Coffee Can Portfolio is all about.

The idea of a coffee can is simple: 

You try to find 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.

The Un-Balancing Act

Robert Kirby, the Portfolio Manager who first introduced the idea of a Coffee Can Portfolio, recognized that most professional investors in the stock market focused on preserving capital as opposed to growing it.

As a result, when their portfolios became “unbalanced”, that is, their winning stocks started to become large portions of their portfolios, they trimmed those positions and transferred capital into their “less successful” investments, the ones that had gotten “cheaper”.

Although that might sound prudent, what was really happening was that money was being transferred from the most dynamic companies, to the least dynamic companies.

Buying With A Twist

The impact of the above approach can be quite profound. Robert experienced this firsthand when one of his clients came to him and asked him to combine her late husband’s portfolio with her own. When Robert evaluated the portfolio, he realized that her late husband had been secretly mimicking his wife’s portfolio (i.e. Robert’s recommendations), but with one twist: He only followed the buy-recommendations, but ignored the sell recommendations.

He would put about $5000 in every purchase and then tossed the stock certificates into a safety deposit box and forgot about it.

Needless to say, he had an odd looking portfolio. Some holdings were worth less than $2000, several worth over $100,000, and one jumbo stock (Xerox) worth over $800,000! 

This one stock alone exceeded the entire value of his wife’s portfolio!

So What Lessons Can We Take Away From This Story?

The Coffee Can is a commitment device. 

It is designed to help you hold on to your stocks for the long term. You only buy if you’re willing to hold on for a meaningful amount of time.

1. You Make Fewer Decisions: By focusing only on the buy decisions, you remove the obsession of checking stock prices, likely reducing your investment mistakes. High volatility tends to scare investors, and in many cases leads them to make bad investment decisions, at exactly the wrong times. Stock prices bounce up and down, but the underlying businesses, if they are good ones, are relatively steady.

2. You Must Diversify And Accept That There Will Be Mistakes: The portfolio above includes stocks that became worth $2000. These were the investments that didn’t do well. There might even have been some that went to zero. But that’s ok. The overall portfolio was still extremely successful. 

3. You Only Invest Money You Won’t Need For A While: To benefit from the Coffee Can Portfolio, you will likely experience stocks that drop a lot (perhaps 50% or more, perhaps multiple times), but if the original selections are good businesses with strong management and competitive positions, the eventual ride will likely be a fruitful one. Like with anything important in life, it takes patience, a commitment, and some luck.

4. The Coffee Can Doesn’t Need To Include Only Stocks: This one may be a little counter-intuitive. After all, we have been talking about stock ownership above. That said, the idea is really about filling up your coffee can with assets that you believe will be worth significantly more years from now. For some, this may include Gold and for others, real-estate. I have Bitcoin in my Coffee Can.

Is It As Easy As Filling Up Your Coffee Can And Forgetting About It?

Well, obviously you need to make good selections to start. But, no one said you can have just one can. No one said how big your coffee cans can be. 

Why not have several cans with several investments each? 

The main idea is that you make your investment decisions up front, rationally.

Then buy. Then wait. Then wait some more.

And give time for your investments to play out. 

I share my coffee cans here: Coffee Can Scorecard

The Virtual Coffee Can

I am a big fan of the Coffee Can approach. 

As I continue to invest, I view buying stocks as adding to my Virtual Coffee Can.

I bet that if I were to analyze my portfolio, I’d find that, on average, my best returns have come from the stocks I’ve held onto the longest, irrespective of short term gyrations.

You should try it.

Related Articles:

1. Coffee Can 1: Teladoc & Eventbrite: A deeper look at the best and worst performers in Coffee Can 1

2. Coffee Can 1 (A Recap): A Recap of the remaining stocks in Coffee Can 1.

3. The Coffee Can Mindset: Thoughts on mindset in the context of Coffee Can 2.