Problem is that it is tough to follow Coffee Can investing unless you are dead or have a saint like mentality. Even quality names go through temporary trouble and it is very common for people to move out of the scripts during those bad times. Back-testing at least gives you the perspective about what happened in those bad times compared to the broader market.
Personally, I would love to follow Coffee Can investing, but I know I still don’t have saint like mentality.
However, I try to stick with quality. Quality investing is not about high PE investing. I mean, Quality companies trade at high PE, but reverse isn’t true.
For example, IRCTC, Affle, IndiaMart etc. all trade at high valuations but they still don’t qualify as quality simply because one important filter of quality is consistency of performance over long listed history: how they’ve allocated capital, how they’ve honored minority shareholders, how they’ve managed the company operations, how they’ve performed w.r.t guidance given etc. So, Quality companies include a LOT of qualitative filters which needs time to build.
Another important parameter of quality is how the companies’ products fare w.r.t its industry, i.e. How under-penetrated those are, How better the company is doing to ensure quicker penetration, How insulated the demand of the companies’ products are during economic downswing etc.
Quality companies do go through prolonged rough phases.
HUL indeed went through ~ 10 years long time correction. And, if you study HUL of that period, you will know how they were facing issues in competing with agile homegrown FMCG players like Marico, Dabur, Godrej etc. Not many companies come out of that difficult phase. HUL has since reoriented their strategy to focus on premium products where the competition is less and started doing well. In the retrospect, it is easy to say that HUL recovered because of quality but when you are in the midst of it, it is easy to assume that it had lost quality, & it was somewhat true indeed. Coffee Can investors could’ve held HUL through that phase but quality-focused active investors were right in selling it during that period. They can always get in after the performance becomes steady again.
ITC was a quality compounder because (i) Legal Cigarette was much under-penetrated compared to illegal Cigarettes, (ii) Taxation was less strict & (iii) Size of ITC was appropriate to grow despite the Taxation trouble. But, size has become the main constraint for ITC now. They can no longer grow without other verticals firing. So, they did a prolonged Capex and is waiting for that investment to bear fruit, mainly in the FMCG. I fear that it will take significant time for ITC to start growing again as (i) size is a constraint again, (ii) Brand building takes very long in FMCG (Most prominent brands in FMCG are nearly 50 years old.). So, ITC, in all probability will go through prolonged time correction, and will get re-rated if it shows growth again.
Actually, here is the dilemma of claiming a company as quality. One may call ITC as low-quality business now, or could’ve called HUL a low-quality business during the noughties. But, I believe that in the context of Coffee Can investing, quality is much more about the gene or culture of a company. You got to put faith in a company that has lasted & is growing for ~100 years.
Also, coffee can investors must diversity to protect themselves against temporary/prolonged slowdown in one or more scripts. Quality focused active investors can afford to own a concentrated portfolio, as they will bail out if the temporary/prolonged slowdown is visualized in a script. I am not a supporter of Marcellus but I believe they sold Marico because it is now entering a prolonged slowdown phase, and Marcellus is an actively managed PMS.
Regardless, I enjoy all the opposition of Coffee Can / Quality investing. It at-least ensures that not everyone will follow the same investment style. In fact, one anecdote states that not many actually follow this style: