Coffee can method

Investing Strategies
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My apologies if anything appears like harsh tone.

But are you referring to https://freefincal.com/ links.
My perspective: Pattu does a tremendous job of working on financial literacy along with PV Subra. I have benefited tremendously from them over last few years.

Let us not run down others just because their blog/book is making some money. It is a fact that they spend a lot of effort to get useful content out there.

You post a lot and I understand your perspective that you find markets expensive and feel that markets may go no where in medium term. But a concrete theory of cycles is what triggered my curiosity. No one wants to loose money and I wanted to understand more :slight_smile:

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With all due respect, would you mind outlining the strategy that you follow at times like these, which we can tweak it as per our situation?

I ask this because you do not conform to the consensus of average investors. Nobody in this forum subscribe to that consensus but you emphasize on the pitfalls, and speaks of a precarious journey ahead more than anybody else. While I do acknowledge and understand the essence of your belief, it is not enough to know that it is going to be tough.

We all agree that, you present past data, might have seen a bubble, a global meltdown, a recession. While history could repeat or rhyme, don’t you agree that India in general has changed quite a bit in the last 15-20 years? I am an average person in every sense of the word, but even I see a lot of change happening around me, so you know more than me. Young demographic, new aspirations, increasing disposable income, some comforts have become sort of needs to some people. There will be an opposite environment as with everything else with economy too with everything working against the country, but would that be permanent? An IT employee may lose his job as it is linked with other economies but not a farmer who sells to Indians, I have read about certain farmers getting bumper returns on their crops. So if all works in cycles, and a down cycle has started, it will end sometime and the next leg of bull run or a positive environment at the least will start again, when I don’t know.

And I don’t go as far and say that this time it will be different but I will definitely say, some portion of the people who are investing via MF route are investing after understanding about equity, these people I believe will not stop their investments SIP or otherwise when they see markets going down. They would perhaps take a pause but do not stop, as these are all salaried class who don’t own any property or have an income that supplements their salary, and depend only on their salaries and thinking that equity will deliver. I am not talking about people who are blindly SIPing dreaming that they will be wealthy or expecting a good return, jumping from one fund to another, believing in fund managers etc.

What else does an average salaried class man can invest in? Gold is more volatile, I think when I am buying 1 single share, I can at least make some calculation of what price to buy, if not that the qualitative aspects of the company, at least the dividend yield, but cannot asses gold. Real estate is out of the question for many salaried people, even 1 cent of land in a town costs you some 3-4 lakhs.

You are experienced or could afford to wait on sidelines, young people with responsibilities and aspirations cannot afford an opportunity to be lost, direct or MF route. I don’t think they would want to wait for 2-3 years for a bear market to start and then invest. They will wait if someone questions their knowledge, educates them and if possible provides a solution.

So my request for you is to outline a strategy that you think will both protect and grow the capital, that suits our present state, until markets make decisive moves and start going up or down. I have read comments of people asking if their fund selection is good, and if not to suggest some good funds, but this is not that.

I am open to all ideas and formulas, as in these turbulent times, I have started to protect my gains, fearing that they will be lost and knowing that I can always get in and invest again at a much lower price and I have to admit the result has been mixed, some went up and some gone down, as they are individual companies with no comparison. I am a bull as I am invested and I am a bear as I have invested meaningfully and fear of losing it along with the opportunity cost of a simple FD.

There are 4 funds in the liquid fund category whose AUM is more than 50,000 crores, with HDFC fund at 86,000 crores. The AUM of top 10 liquid funds by net assets is 4,30,000 crores. So certainly people are waiting.

I have read somewhere in this forum that one should not talk about his investments as it is counterproductive. So if your strategy is your secret recipe, I will go no further.

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The biggest loophole in the Coffee Can method is that it assumes investors are rational beings who can make plans and stick to them for 10 years. Fact is people are quick to reconsider decisions like career choices & marriage, leave alone investments :slight_smile: Coffee Can method obviously works in theory but in reality it will not work for 80%+ of the investors for this very reason.

Also I see these Coffee Can portfolio managers setting very wrong expectations in the market, investors are being sold dreams of 18-20% returns over the next 5-6 years which in my opinion is just not going to happen from current levels of their portfolio companies. Building a portfolio of companies where the average P/E is 55-60 and going around town speaking of 18-20% returns using historical returns of Asian paints, Page Ind, HUL & Relaxo is something every investor needs to call these portfolio managers out on.

Investing looks very easy and simple in hindsight but is very tough to pull off real time. All of us know this, the Coffee Can method is yet another attempt to make things look much easier and simpler than they really are - it is a very good sales story but I have serious reservations of it being an “all weather, all investor” approach

My take is that 18-20% return is doable over the next 4-5 years, just not from these investments from the current levels. Also we are and will continue to be in a start - stop market cycle across the world, this 18-20% return compounded will happen for some periods but is unlikely to sustain over longer periods - no matter what strategy one picks and sticks to.

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I do not think all times are good to invest, SIP or remain invested. Discretion is required. A successful portfolio, imo, would be made in three crucial steps:

First step, and most important, is the process of making bulk investment. Since, this is so important it is best to be defensive. If properly done, this step alone will give a retail investor the much needed psychological perspective (strength) to become a long term investor (for real, in action and in spirit).

One should initiate this step when the whole market is in a state of lull, when valuations, for individual companies of your selection, are cheap to reasonable. In this state, any of the standard valuation techniques like DCF, Valuation by PE or forward PE, valuation by book value etc will be of use. (But, apply these techniques in the current market and you will most likely have a disaster at your hands, and the results will be even worse for the investors you are making bulk investment now). For double confirmation, and if you are not an expert with numbers, you could subscribe to a (paid) reputed service that has sufficient experience.

Market finds itself in this state of lull for only about 30% of the times. So, yes, you will be waiting for the market to be such, and not as and when you have the Cash, a way which is being popularized. So whatever you do, don’t blindly follow blogposts, fund house reports or brokerage reports. Let this be your hardwork, your decision and 100% your responsibility. So you better be upto the task, do your hardwork by leaving no stone unturned to get this right. This will give you the much needed psychological support.

Second step is doing SIP.

When the valuations may not exactly be cheap, but not expensive either or when an individual company dips for innocuous reasons or a sector is facing temporary headwinds. This step builds your portfolio in smaller percentages over the strong base that you have made. Market spends most of the time here, and we take benefit of the fresh income we get overtime.

The last step is of Exits, where the above hardwork over the period of five years bears fruits. For a retail investor this is most important. This gives him the much needed psychological incentive to

follow principles and rules. Reverse-SIP is to be initiated, transfering wealth from equity to liquid instruments.

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Some thoughts on ITC.

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In retrospect, these gems were better hidden!

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Its 2 year old article and most of them have seen their best

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True, Graphite India, Rain Industries & KRBL are struggling with there problems. One should kept distance away from these picks unless you are aware having the insider information.

Lakshmi Machine Works’s QoQ results are showing declining trend and YOY Sales are muted for last 5 years.ROCE % is also steadily declining.

Symphony & Vinati Organics looks good on few parameters but valuations wise are expensive.

One question arises is mind is that ‘Whether big institutional investors want to get rid of few of these stocks buy loading shares to Public?’

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Another one just for laughs!

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This is my favorite thread on valuepickr, and i have been a lurker mostly till now.

The basic principle behind coffee can, at least according to me, is that there are businesses which have a moat/ competitive advantage. The moat protects them from competition and hence these businesses are more predictable than businesses without a moat. Now, any business goes through three stages - proof of concept, replication and maturation (borrowed concept from here - https://www8.gsb.columbia.edu/valueinvesting/sites/valueinvesting/files/Graham%20%26%20Doddsville_Issue%2036_vF_0.pdf). It is a good idea to invest in business with a moat during the replication stage. Proof of concept if very risky while at maturity the rate of growth will slow down considerably.

I agree with you that you cant buy and forget in todays times. The businesses have to be constantly monitored to check that the moat is not getting eroded. Additionally, you have to be comfortable with the valuation.

Coming to your examples. Relaxo is a business with a moat. However, until 2013, people had not realized that this is a moated business (or it may have been in the proof of concept stage). If i’m not wrong it used to trade at a PE of ~20 or below. Even at that PE, many people (including some senior folks at valuepickr) were not comfortable buying it and thought that it was reasonably priced. Today its PE is >60.

Asian Paints is the one example i would never have chosen as it is opposite to what you are trying to say. Asian Paints became the largest paints company in India in 1967. And they have held onto that position since then. Despite competition, their moat is intact and the business continues to grow. Of course it may be overvalued at this stage, and if you are not comfortable with the valuation, i understand that.

Long story short, it pays to identify moated businesses and hold onto them. And in that spirit, I welcome the discussion in this thread.

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Can you please elaborate on Relaxo’s moat. Thanks.

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I guess without getting into theory HUL, Titan, Nestle, ITC, Asian paints and few pvt sector financials, do form a formidable moat and most them have increased their moat and hence look good for next decade.

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i believe companies like Nestle ,3m are different from Asian paints, etc in terms of growth, secularity of oppurtunity and 3m especially operating across different industries . So all coffee can companies are not alike . Relaxo is perhaps IMHO not in the above league at all

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Reposting since there was some naming calling which is expressly prohibited in the forum… Apologies for that,

In the Indian context, there is a high probability of “Coffee Can” only yielding a “Can of Worms”!

  1. Relaxo - It is obvious that the company has been able to generate high ROCE thanks to deleveraging. Check their below par performance 10 years back to know that the Dua’s are regular businessmen who have decided to focus on brand building without taking on excess debt. Since I have worn their shoes and footwear, havent observed any “moat” so to speak. Their experiments in new designs and expansion plans in South and West markets would require significant investments which may not pay off. While they have grown well in the past, it would be foolish to extrapolate any significant outperformance in the future solely based on their history.
  2. Dr Lal Pathlabs - Again, diagonostics requires significant initial capex, high operating cost, threat of competition from local and national players (besides hospital chains) and regulatory/ operational risks. To succeed consistently, one would require to expand geographically and vertically entailing constant investment through debt laden capex. If Vasan and Throcare are anything to go by, competition from local diagnostic centres / chains (almost a lakh in India) can make it unviable to sustain high margins on a consistent basis.
  3. Asian Paints / Titan / Page - Consistent compounders of the past would be impacted by their high base effect in case of market downturn. A large FMCG play has to tackle rising inventory costs and falling collections which can quickly erode operating margins. Slowdown in growth can impact price to growth ratios resulting in significant price correction (discounts to keep up sales).

“Coffee Can” approach which ignores changes in the macro economic condition (say a recessionary environment which is currently underway) based on the argument that these scrips are immune to market cycles (whether cyclical or structural) ignores the basic investing principal of “buy low - sell high”! Unfortunately, investment gurus who are featured on business channels and who also run their own investment desks would prefer you to believe otherwise!

India is too fickle a market and Indians are too devious for one to sleep over his investments under the pillow (or in a so called Coffee Can) under the false hope of a multi bagger!

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I agree with you, would be really nice if you can elaborate on your thoughts highlighting the differences between Nestle, 3M and Asian Paints. Would be good to know your thoughts on these. Thanks

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Hi
3m is a company that is totally based on innovations. And it doesn’t just operate in one industry but across many industries such as consumer, industrial , surgical etc . Heard that 20 percent of its sales every year has to be from new products . Hence its diversified too.
Similarly nestle can introduce huge number of products and has parent support for that plus consumer stickiness for baby powder or maggi etc . It has yet to deeply penetrate into rural markets and hence opportunity size is large and growth does not completely depend on just increase in market but also introduction of new products within the same existing market as well . Their shelf space too is increasing over a period of time in stores as someone observed in Nestle thread .
Asian paints is a great company and has huge distribution moat . However the growth really depends on the state of the economy and can depend on market itself expanding real estate and although it’s also into repainting , cannot be considered as secular as Nestle . There is a limit to which new products can be reintroduced by Asian paints and perhaps that’s why they are moving into modular kitchen etc . Before some time both were available at similar multiples . And if that’s the case Nestle would be undervalued considered to Asian paints if they sport similar pe . The same can be observes from the growth rate of Nestle and asian paints in last few years . Moreover Asian paints is also dependent on oil prices as a raw material which is not the case with Nestle as milk prices / wheat etc generally cant increase as much as it concerns common people and temporary spike would be immediately controlled by government. Last few years it was also affected oil price as seen in its pat growth . On the other hand , if one normalizes for maggi issue , the profit growth could have been even more . The new mgmt change that happened after Maggi issue has been more aggressive in playing the volume game rather than focussing on prices as can be seen from recent profit growth . Currently all these stocks might be overvalued but still if I have to choose only two , I would choose Nestle and 3m over Asian paints else I like all three . In fact Berger performed better than Asian paints since last many years so sometimes good company may not be a good investment. Lot of gains of Asian paints in past few years have come from pe expansion rather than earnings growth . Also it can never be considered truly secular like a FMCG. However it has taken me a long time to come over my bias for Asian paints and it’s easier said than done . These bias has had me stuck in Page and Eicher too earlier on hope investing . I believe good companies might also face a pe compression when markets dont see growth for a long time although good companies get more time by the market while not so good get just a quarters time . I prefer high pe companies where there is growth visibility as have suffered losses from hope investing earlier . Although it’s very tough to decide when to pay high pe and when not to as there could be lot of companies posing as secular when actually one isnt secular but just the poster boy of a particular cycle . Eg Avanti feeds , Mayur uniquoters, Eicher . Hope it’s useful. Please take my view with pinch of salt as I am an amateur investor and there are high chances of me being wrong .
Disc - invested in some of the above companies. I am not a sebi registered analyst and pls do your own diligence before investing

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Repainting constitutes over 70% of the paint demand in the country, and occupies similar or higher proportion (around 90% I believe) of Asian paints demand. Therefore its demand remains quite robust irrespective of the real estate cycle.

Asian paints is more than a brand; it is an exceptional paint logistics company. Its ability to restock dealers on short notice is unparalleled. This allows dealers to maintain smaller stock which they can replenish on actual customer demand. Therefore unlike for other paint companies, dealers don’t have to take credit from Asian paints, and can pay the company quickly in cash. This results in a very small cash conversion cycle for Asian paints which is its moat.

Cash-conversion-cycle
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Also repainting demand has proved quite inelastic to raw material prices. People don’t usually postpone their decision to paint home based on current prices.

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Yes I agree with your views and it has a huge distribution moat which is so well explained in Marcellus webinar that referenced in the beginning of this thread . However the moat doesnt generate profit as it used to do earlier . Moats are effective when they continue generating profits consistently across cycles . Despite it being in replacement market , theres low profit growth in past few years . I believe the reason is it cant expand its market share in the existing market ( it being already at 50 percent) and the market needs to grow overall for it to expand. Stock price growth has come mostly from pe expansion as compared to earnings expansion in the past 5 years . and IMHO although it’s a great company, it isnt a great investment . PAT growth of last 5 years is lower than the earlier 5 years . It gets affected by rm cost despite pricing power . Berger PAT growth was much higher comparatively . Reason being it was able to capture market share from existing players and also grow in this tough conditions . Perhaps Asian paints can only grow as much with a 50 percent market share already , hence it has seemed to look for alternate growth avenues diversify into modular kitchen whereas Berger has chosen to maintain focus exclusively on paints . Asian paints 5 years pat CAGR has been just 8.71 percent and 3 year CAGR is even lesser. 5 years is a reasonable time for a secular coffee can compounder company. Nestle 3 year PAT CAGR is 17 percent . I believe that secular nature of stock is essential if it needs to continue its place in my coffee can part of the portfolio. To my mind , coffee can portfolio might need a revisit every few years to test the thesis whether the profit growth still holds as the precondition for inclusion is a consistent performance of compounding overall and especially in past 5 years . To my mind , Nestle and 3m are better contenders . It might still continue to compound but I believe it’s difficult to replicate its past performance unless the cycle picks up and its here that I believe a coffee can portfolio stock should depend on very less variables . HDFC bank is a prime example of a coffee can compounder as even now it consistently grows PAT at 20 percent or more secularly irrespective of economy condition and has proven its mettle across cycles as of now . Coffee can portfolio needs a revisit every few years periodically to test growth and consistent compounding performance as in todays time and dynamic scenario, it’s difficult to invest for 10 years and forget as there would be a opportunity cost to it when one stays invested for more years and PAT doesn’t go anywhere .
Disc - Standard investing disclosures apply as mentioned in my earlier post.

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Relaxo derives its moat mostly from economies of scale and their focus on a certain customer segment. Their products are targeted to mid to lower end in terms of prices, hence price is really important for these customers. At scale, Relaxo is able to offer the products at very competitive prices. At the same time, it is able to reinvest in advertising roping in superstars such as salman khan, akshay kumar etc. This kind of advertising gives the product an aspirational quality for the their target customers.

It is a virtuous cycle. The larger the scale, due to scale economics, they can invest more in advertising, which will lead to more demand and more revenues, while keeping a strict control on their prices.

As someone mentioned, Relaxo’s moat is not as strong as Nestle, Asian Paints, etc. But it is still a solid moat, and they can continue to grow as long as they are able to execute on this strategy.

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Beautifully said @A_shah . Glad that you have not fallen for the Marcellus campaign machine. Even the profit growth of 3m during 2007 to 2014 was deplorable and so was the profit growth of Nestle from 2007 to 2017. And I feel a Van Heusen underwear is far superior to a Page underwear. Moats have to be protected constantly.

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