Coffee can method


(Arun S G) #23
  1. The CC method is not about choosing blue chips. Its about choosing companies that have consistently grown sales and have healthy ROE over 10 years. We need to check first if the list of “blue chips” above meets the criteria to be included in the coffee can. There may have been others that fulfilled the criteria and not appear in this list.
  2. Taking the list from 1978 and checking in 2018 - 40 years is rather unfair to the thesis of CC! What happened to this list in 1988 is a fairer thing to check.
  3. Nowhere does the CC method say, have one can all your life. The very fact that they make an annual list shows that the list can change. So, the recommendation presumably is to add the current year’s stock, without disturbing the previous year’s stock. If a stock repeats, just add to existing holding.

For longer horizons, i.e. 20 years and above ( lifetime investment !), there’s a separate thread and the criteria that I could conjure up are somewhat different than financial ones. Longer the time horizon, harder is the framework.

Cheers
Arun


(phreak) #24

I think choosing long-term themes is how I would choose a coffee can portfolio. So instead of current bluechips, it will be companies with a long runway as India’s middle-class grows in size and also in per-capita income. More important is long-term survival of these companies, so either businesses with low rate of change or where there is high-rate of change that the business can benefit from (businesses known for disruptions in a space known for disruptions). For eg.

Thyrocare - This company will have great payoffs in the long-term, as India’s median age crosses 35 where lifestyle ailments start creeping up. There could be technological disruptions in the space but definitely not meaningful ones in the next 10 years.

Havells - This is a play on Consumer durables, especially air-conditioners. I think a bulk of the spending in the coming years will be in this space. Havells is building a handsome brand and distribution reach, just as Asian paints did. It is amazing how far Havells has come, from being a mere cable manufacturer. Disruption risk is low in this space.

Titan - Best way to play consumer discretionary in a safe way.

HDFC Life - This will be only financial play I would have, as I have an aversion to lenders. Insurance is very under-penetrated and is bound to grow.

Info Edge - This will be the only IT company I will have, since it is a product company/VC Fund of sorts. This is the best way to play the tech disruption IMHO, as this company funds the disruptors. They have potential to uncover one Zomato/Policy Bazaar every 5 years and the moat around Naukri will let them stay relevant as long as people are still looking for jobs.


(Changu Mangu) #25

Hi @arunsg Are you referring to an existing thread? Are your thoughts there? Could you share your criteria? I would love to learn from you on this.


(saurabhshares) #26

What are the current stocks in ambit coffee-can portfolio. Is this available in public domain?
If the list is available then we can discuss stock specific wrt coffee-can philosophy.


(Arun S G) #27

Yes, existing thread here: Permanent Buy and Hold Portfolio


(Pratik--Patel9) #28

Thanks 1.5cr for sharing this. I found it very informative.

I think a lot of people who are commenting here have either not seen entire video or read the book.

I think fundamental premise of the idea is that for a business maintaining required ROCE and revenue growthfor 10 yeare, there is a very strong and reliable signal for long term investment horizon. If you have a portfolio of 15 such businesses then you are bound to have some of the best businesses which are aligned and resonating with India’s structural growth story. These are best compounders some of which might be classics like Asian Paints or HDFC that everyone knows about. For such businesses the rerating will not happen but the earnings growth will take the price forward. At the same time, you will have some businesses which are upcoming Asian Paints or HDFCs. So on average, it is very logical and reliable to think that the portfolio or the can will outperform the markets in a 10 year period.

They have done a very good research and have provided verifiable back testing data. 23% compunded return can do wonders to the portfolio in long run so it’s not fair to say that this approach can not produce abnormal returns.

I think its a very good idea for someone who has some other full time job or business. He or she can keep creating 10 yr cans every year and if they make median returns found in back testing then they would be very reach in 20 years or so.


(NRS) #29

All such fads emerge time to time infested with survivorship bias and recency bias.

History has enough examples both sides.

http://economics-files.pomona.edu/GarySmith/Nifty50/Nifty50.html


(Dhiraj Dave) #30

Find enclosed original Coffee can investing approach article published in 80s.
the-coffee-can-portfolio.pdf (487.5 KB)


(Hitesh Patel) #31

@1.5cr

Ambit guys used to publish their coffee can portfolio picks and the backtested results of such earlier iterations.

The stock selection criteria were quite clearly defined so that they didnt end up with poor companies in the list.

For someone with very long term approach wanting peace of mind this is a good method to approach investing. Personally I realised quite early on while reading these CCP newsletters that my style was different and hence did not pursue it too vigorously.

Ideal thing is to do more research on companies making the cut through this method and then zero in on better quality companies and then prepare a list and invest in them. These days screener provides multiple screening options to find out a list of stocks fitting all the criteria and that could be a good starting point.

I have yet to read Saurabh Mukherjea’s book so cannot comment on that but I used to track the Ambit version of CC method and was quite impressed with it.


(Abhishek Basumallick) #32

Any strategy that focuses on long term holding of stocks is good. Any strategy that completely disregards valuations is bad.

I believe that the market and it’s constituents are in a complex adaptive system. You cannot buy and forget. That is more true in a growing economy like India. You have to keep a close eye on what you have bought and should be prepared to switch stocks if you have made a mistake while buying. Also, you need to be able to sit through periods of large volatility.

Opportunity costs have to be kept in mind. You cannot buy and then realize years later that you have made a mistake.

Broadly two types of strategies have worked over time. Value and momentum. Indexing, for example, is a high level momentum strategy, where the best performing set of stocks are put in a basket and given a label like sensex or nifty. If you are unsure about individual stock picking, then putting money in an index fund is a sensible approach for a very long duration because the index managers will throw out the poor performers and replace them with the good performers.

In a nutshell, if you go through the minute details of a CC approach it falls short in most respects.


(Deepak Venkatesh) #34

Hi

Interesting to see this thread. Though I am not a believer of coffee can method of investing I thought I could chime in with my personal approach (not that one has to agree with it).

I have posted it on a Medium note which is here:

It is a little lengthy, a 5 minute read so would avoid pasting it here.

Regards
Deepak


(Arun S G) #35

To make this more realistic & perhaps even graphic, I’d add…don’t trust even your own corner. Your trainer ( emotions) could spike your water with mood swingers to make you high, or depressed and take wrong actions in the next round. In fact, I’d go even a step further and say, the bout has no rules & an ineffective referee - - your opponent could knee you in the groin or gouge your eyes or even pull out a knife. Rather than a boxing ring, imagine you’re in a street fight with a hoodlum and your level of caution & training will go up several notches! You may even hire professional bodyguards - called mutual funds!


#37

The professional Bodyguards/Soldiers may or may not protect us like they did in the past, it is getting tough for them, can’t rely on them blindly. So either I am by myself confronting the King (market) or embrace what the Prince (index) gives or I could do both.

P.S A novice investor’s attempt at continuing the analogy.


(1.5cr) #38

I feel like PE does matter to an extent. However ROCE & ROE with great quality and consistent earnings growth matters more. Taking all that into account I have built this portfolio. Goal is to outdo the index by 3-5% plus. Rationale for all is simple as all are well known cos.

  1. Asian paints (paints is an evergreen industry for the next decade or more. Lots of infra and housing to come up in India, this increases the overall replacement base for paints as well. They are venturing into other verticals too in order to increase growth. A structural play in a cyclical space. Kansai Nerolac have stated that they expect the paint industry in India itself to grow at double digit cagr for the next 30 years)

  2. Orient refractories ( a consistent compounder with high roce and a 100cr cash balance. Recent merger and its parent is the largest refractory company in the world (RHI Magnesita). They have big plans for India. A consumable non-cyclical in a cyclical space. A compounder as long as steel is used on our planet)

  3. Abbot India (A cash cow. Uses its parents R&D to launch drugs in India. A play on consumption in India. Virtual Monopoly in many of its products. Concern is the private arm of Abbott, but I think pharma and drug related products will go through the listed entity. So not too concerned on that front.)

  4. HDFC bank (deploying capital at high rates of return and a capital intensive business. These are the best kinds of businesses. Capital is constantly being invested at high returns. Growth in Indian credit as well as good underwriting. Major part of all MFs and the index)

  5. ITC ( comparitively cheap fmcg company. Ample visibilty and the non cigarette business seems to finally be doing well. Good Cash machine.)

  6. Dr Lal Pathlabs (Great theme. Long runway. Earnings should grow well over next decade.)

  7. HCL tech (taking steps to transform the business for the next-gen of tech in iot, moving into products over services etc:. Valuations in favour for such a consistent performer. Good capital allocation with high roce roe. Market seems to have written off IT companies.)

  8. Cadila healthcare (a consistent performer inspite of regulatory hurdles. I think pharma in India and Indian pharma companies have a long runway and earnings will grow well over the next decade.)

These 8 cos are what I have come up with. I would like other interested members to share their views and CCPs.


(Dev_Kerala) #39

Agree with HDFC Bank, Asian Paints and may be ITC. Would add Britannia and HUL (especially after acquisition of Horlicks and Boost). RIL is also a strong candidate.

HCL Tech - Hard to imagine consistent growth here. Too much dependence on Infrastructure services, for growth. I would rather bet on TCS.

Dont know about Orient and Lalpathlabs.

Abbott is interesting. Need to study Cadila. How about Natco?


(Dev_Kerala) #41

I worked in HCL Tech for some time, in non-infrastructure services space. Now working for a competitor. To get the level of growth you mentioned, they need to outgrow competition in areas other than Infrastructure services which is not easy. A company like TCS had benefitted partially from the leadership chaos at Infosys and the lack of focus at Wipro (which is even out of Sensex now).
I may be wrong as Market knows something I dont know.


(Dev_Kerala) #42

I was a regular customer of Thyrocare for some time, but went to took Apollo Diagnostics once. The cost difference is not much higher in my view. So, high growth will bring in strong competitors. But yes, Thyrocare looks promising as they compete mostly with the unorganized sector.


(CP) #43

PC Jewellers was also part of Coffee Can at one point of time. So may not be an ideal strategy beyond largecaps


(CP) #44

Agree with you on Thyrocare @devarajank. I’ve taken their full body profile as well. It looks like a strong bet to me, except it looks expensive at 28 P/E.


(1.5cr) #45

We must understand that the backtested coffee can portfolio was akin to a robot. It is very easy for ambit to have left out PCJ from the CCP of that year. Some companies will of course lead to permanent loss of capital by a large amount at that. Inspite of that the portfolio ends up giving a great return over a decade. He was inspired by the VC model to an extent. So you can expect a set of outliers to drive the returns of the portfolio and this has happened consistently throughout the CCPs given by them as a reference…It is easy to pick out the losers that maybe few and far between compared to the winners and the big winners. I think if we were to pick out losers for everyone then we would all be criticizing ourselves every single day haha!