Coffee can method

[Sahil_Vaidya]

Great thread and insights. I’m personally a big fan of the CCP approach and am trying to mirror the CCP portfolio by Marcellus- pretty much the same stocks listed by @gurjota above.

I had one question- how do you continue the CCP approach over the years? Do you take a certain amount every year and deploy equal parts in the new CC list as per the latest figures? If yes, can someone share the screen used on Screener to mirror the exact Coffee Can criteria? Because as far as I know, there’s no screen there like ‘YOY Sales Growth 10 Years’. If there was, this would have been straightforward.

I’m a beginner btw, might explain if any of this sounds amateurish. Hope to hear your views, thanks!

[jamit05]

@gurjota

The Average TTM P/E of this CCP is 45.6 vs Nifty current P/E of 16-18x and this portfolio is absolutely smashing the Nifty - please read, re-read and again re-read this point!

A retail investor can interprete this in two ways:

A. Buying good stocks at any PE is surely going to be profitable in the future.

B. Buying stocks that appear to look good, but buy them when they are not commonly perceived as “good”. And hold them over the years as long as they remain “good”. And if the investor has done the due process well, then the stock just might trade at a high PE, and he will hold onto it throughout… till terminal value unfolds during which he gets hefty dividends.

[kashif_1461]

Absolutely agree. A lot of the companies touted by Marcellus have seen majority of stock price gains due to multiple expansion; in the hopes of future earning expansion. If the hoped for earning expansion does not come, the multiple will collapse at some point. In fact for some of them, this seems to be happening. These companies have enjoyed a good run, but the paradigm is changing. There is research (some of it shared in valuepickr in a different thread) which says that during a recovery small cap value stocks outperform large cap stocks (https://www.osam.com/pdfs/A_Historic_Opportunity_in_Small_Cap_Stocks.pdf). While much of this research is not from Indian markets, but I would not be surprised if that is the case in India as well given the underperformance and undervaluation of these companies. My sense is that Marcellus portfolio will underperform the markets over the next 10 years.

Don’t fall in love with the gospel of Marcellus. Even i think that these are extraordinary companies but i wouldnt buy them at the current prices. Except maybe ITC.

[Harsh1]

@deevee

Hi Deepak

Have been great fan of your’s. I do follow you on both Value Pickr and twitter and do take notice of what comes from you with great attention.

Let me put some of my view on Coffee Can

This thread was started as one of the method and I am sure there are many ways to heaven (or stock market success)
Off late This method is under attack for variety of reasons,
1- Marcellus
2 -High PE Critics

The Style has nothing to do with Marcellus PMS and it never was All in one method that included Valuation.

A simple Filer of 15% ROCE and 10% of Revenue Growth in each of 10 precedeng year and hold them for another decade - yes that’s it

So I just went and picked up what the the porfolio as thrown in 2010 iteration from Unusual Billionaires Book turned out, No hindsight Bias as well

The 2010 iteration completes decade somewhere next month and lets see what we get

Total 7 Companies gets picked up

2 gets delisted - Tulip Telecom and Amar Remedies

2 BFSI Companies get blown up - PNB and DHFL

Only 3 left - mind you 57% of the pick bites the dust and this has to be the most unluckiest Portfolio picked up ever

Yet the Portfolio outperforms Sensex by whopping 46% , Sensex changes its composition twice every year and comes up with best 30 companies

Ofcourse 8.75 % CAGR is nothing to write about but with some tweaks I cant see why a decent portfolio with few additional filters cant outperform index even better.

If any Dumb Guy rode the portfolio then he actually made the smart decision. He won despite Corona, IL&FS , GDP slowing Down and more so Corporate Misgovernance in 4 out of his 7 stocks

He saves the frictional churning cost, saves taxes, Management Feea nd time. He does away with the need to keep up with all news and Annual reports and Concalls (It can be remunerative in very few cases and major emphasis on very few)

I have seen guys who can write thesis and thesis on “Value Investing” and compute “Intrinsic Value” to decimals having results nothing to speak about (No reference to any person in particular because there are just too many) and here a portfolio on AutoPilot crushes Index and so far all the iteration have outperformed the index so far

I rest my case. I respect all opinions and no matter what i’ll continue following your thoughts on both forum

Disclosure: No connection with Marcellus

[gurjota]

Again this thread appears to be going completely off-track!

Either we need to rename the thread or stick to the relevance of a “Coffee Can Method” i.e. picking up good quality companies and not touching them for years/decades.

The only reason why some of us (me included) have talked about Marcellus or it’s fund managers is simply because:

1. They have written a book on Coffee Can Investing which proposes a method of how to go about building a portfolio full of Coffee Can stocks using some financial filters. We can now judge for ourselves whether these filters are actually useful or not for picking Coffee Can type of stocks - quality companies that can be left in the portfolio for years/decades without touching

2. Marcellus Team “claim” they practice the Coffee Can Approach to picking stocks for their Consistent Compounders Portfolio PMS. And we all know the constituents of their PMS, so again we can judge for ourselves if these stocks / PMS appear to be picked with coffee can mindset or not. It would be much better and constructive if we point out the fundamental business related flaws in some of their stock picking and share why they are not Coffee Can candidates

Now let me share what I meant by this because it seems to have set the cat amongst the pigeons for a few Valuepickrs

@gurjota

The Average TTM P/E of this CCP is 45.6 vs Nifty current P/E of 16-18x and this portfolio is absolutely smashing the Nifty - please read, re-read and again re-read this point!

There is a generally held belief that high P/E stocks are over-valued / expensive and hence - investors should not expect great returns if we buy such overvalued companies. For example - if Nifty 50 was trading at a P/E of 45x pretty much all of us would be in 100% cash right! But with Marcellus PMS here seems to be an example of a “CCP method” inspired (jury is still out on that - please feel free to highlight specific business issues) portfolio which is outperforming the market. Ideally, this should motivate us to do more digging on some of these companies and find out if they really are CCP type stocks and does the market outperformance seem justified? Maybe some of these answers we’ll only find out after a long long time - 5/10 years.

Coming back to the simple point - High P/E for stocks / portfolio does not equate to future underperformance. Low P/E for stocks / portfolio does not equate to future outperformance. And vice versa holds true as well. That’s it! I’m not pushing high P/E stocks or anything! It was just a comment on the 1 year market performance of such a high P/E portfolio where the Nifty gave huge negative returns! Hope that clarifies!

@Karthikeyan_K_R

Marcellus who have a history of less than two years, are highlighting their outperformance over NIFTY since inception. Anybody who can think and anyone who has a clue about what integrity means, can judge for themselves. “Buy at any price fund managers” = “snake oil salesmen”. All they want is AUM. They will scream BUY always !!

I’m not sure exactly which post or thread is being referring to with this! What is the relevance of Marcellus’ marketing for this thread? Who’s asking you to invest into Marcellus PMS?

@deevee - More than half of your post talks about PMS performances and investor returns in those PMSs! How is that in anyway relevant to this thread? We already have some threads on PMS funds. But going by the number of likes on your post - maybe I’m missing the point

@Investor_No_1

Be it Marcellus or any PMS, they keep changing portfolio at varying degree of flipping. Those who are directly into stocks sincerely would never emulate any PMS/PMS manager however great he/she may be.

I see your disclaimer says huge respect for Mr Mukherjea. I am aware of him only through his books. Can you tell other facts which are source of this respect. Thanks

Another post with no relevance to Coffee Can method

I find it extremely hard to understand how people have taken the knives out on Marcellus and their team. This thread is not about them! They just “claim” to have a method to find CCP stocks which might be relevant for this thread!

This thread is only about finding quality companies which can be held for a very long time!

Disc: I’m neither invested in any Marcellus PMS nor have any relation / connection to Marcellus Fund Managers. However, I’ve personally benefitted after applying the filters of their book and Coffee Can investment philosophy.

[gurjota]

@gurjota

However, I’ve personally benefitted after applying the filters of their book and Coffee Can investment philosophy.

And I know again someone might question this and ask for more data on how I’ve benefitted through their book - so here it is. Sharing a list of companies which have outperformed / underperformed Nifty by more than 5% which are on my CCP watchlist (invested in 70% as well).

Using the CCP approach with some additional filters - 18 outperformers vs 6 underperformers. Again short time horizons for most of them, but I’ve shared the same data just after the March market crash as well a few posts above. Again and again I’m able to identify more companies which outperform the market than underperform (short time period the main caveat). You go figure yourselves now!

[Harsh1]

@Abhishek16

The basic flaw in your argument is you are picking 10 year data from 2010 to 2020. If you would have compared same 10 year period from say 2008-2017, you would be finding very different conclusions.

Ok so i compute the returns of Portfolio picked up from 2008 Iteration- Total 11 Stocks makes the cut.

The 2008 Iteration is picked as it is from the book Unusual billionaires and in the book the returns are computed upto 2016- The only thing i do is to compute the returns upto 2018 because thats when the decade ends (same was done in earlier post for 2010 iteration). NO Hindsight Bias

Note: The price are adjusted for Corporate Action and Geometric was later merged with HCL

The results are outstanding - The 2008 Portfolio outperforms Sensex by 85% in 2018 !!!

I went a step further to see what happens if our Dumb investor does nothing in 2018 and continues as it is in 2020

The result is even better though in Absolute terms the portfolio lost less the 1% of its value

A 10/12 Year portfolio (Auto selected on basis of filters in depth of Global Financial Crisis) with no addition/deletion since then is crushing sensex which refreshes itself every year twice and contains 30 best stocks by miles !!!

Further lets see the impact of Corona and likes on the portfolio.

Sensex has lost 11 % from 2018 while the portfolio loses less the 1 % of its value. Turns out the 2008 iteration is COVID resistant as well. Looks like apart from wine, Coffee can also gets better with age

More of a note to myself -

The result of outperfomance is in all probability due to no Human Touch/no Human decision/ no human Bias. Stocks are chosen on twin filters and then left as it is.

@Abhishek16

Besides, I dont think we should see just past 10 years data to reach any definite conclusion in such matters, the reason is most likely we would have covered only one market cycle. As such, lots of recent biases would get factored.

In the Book, the iterations from 2000-2005 have completed the decade and have beaten Sensex hands down , and from incomplete iteration we now know 2008 and 2010 also beats the index, wont be surprised if all the iterations beat index hands down

@atul1082

If we notice last 2-3 years data ,we will see that list of fraudulent companies and the frequency at which they are vanishing has gone up too fast and it’s irrespective of size, reported growth and the management seen prior to exposure as professional, prudent etc. Yes bank/ILFS/DHFL/PC JEWELELLERS are few examples. There have been business environment changes also which are so quick that the best of growing companies lose their 90%worth in a short period eg housing finance.The names and sizes of these companies are in public domain.

Agreed , there are no 2 ways about it. But continue trusting twin filter of ROCE and Revenue Growth
Only 2 kind of companies will make the cut
1- Extremely Good
2- Cooked Books

As a CA and aspiring CFA i can write pages and pages on why 10% Revenue Growth and 15 % ROCE in preceding decade is extremely rare and few and far between. Its a deadly combo. When you get on one such company just Jump on it. Trust me the twin filters have numerous check between them and will mostly weed out frauds as it looks for identifying consistency over a decade and thereby avoiding cyclicals

Thanks
Harsh

[Aravind]

Sorry to disagree with you. The filters used don’t weed out any fraud. But it doesn’t matter even if few companies go bust is the right answer.

Also the iterations you talked about does it cover every possible 10 year iteration from say 2000 to 2020? If so then it’s game, set and match.

[Vijay_Kiran]

Great write up!
In my opinion any intelligent and smart investor can beat hands down any coffee can strategy or any other market discovered strategy of out performance by simplicity of strategy with combination of FD and one cyclical company in last 20 years too, provided one has done a great deal of hard work, detail study and proper defined investment policy! But the last part is very tough, very very tough.

CAGR	23.27%
FD + One Cyclical Company
Date	Cashflows
03/Jan/2000	-100,000.00
08/May/2020	7,070,866.00

So the key question is why to break one head on following so many companies if simple method gives what many fails to come near. IMO its all about doing more and more study before investing or following anything blindly. I observed that a point to point return comparison is meaningless most of the time, what matters is whether the PF return a desired return under all circumstances with less volatility. A PF value of 18% mean return with 20% of standard deviation over long period will certainly put one off the goal when required.

many thanks.
VK

[Krishna1]

Investing Through a Crisis, here A Handbook from Marcellus Investment Managers

Investing_Through_a_Crisis_A_handbook_from_Marcellus.pdf

[Rushabh_Doshi]

Sourabh & his firm usually says this - The gap between RoCE and CoC is the free cash flow that a firm generates for its shareholders.
I wanted to understand is this true & is there a rationale in this.
How is ROCE-CoC=FCFE?

[alexander]

Example can make it clear.

If CoC = 10% =>For every 100 rs of capital I raise (from debt and/or equity), I have to pay 10 Rs of interest every year in case of debt and/or shareholders expect Rs 10 from my company in return for putting up the equity
ROCE = 10% => For every 100 rs of capital I deploy in my business, I get 10 Rs of profit per year

If both are equal (as in above example), there is no additional gain for the shareholders…
Only if ROCE > CoC, there is gain and ROCE < CoC, there is loss.

Hope this helps

[abdul_hakkeem]

how do i calculate Cost of capital. could you please explain.

[alexander]

Weighted avg. cost of capital is the weighted avg. of cost of debt and cost of equity weighted by total debt and equity of the company.

Cost of debt is easy. It’s the interest rate and the total debt is also available in the balance sheet.

Cost of equity is more involved. It is basically how much % return the equity investors expect so that they will be willing to provide capital to the the company considering its risk. The calculation method is called CAPM method for this. Listen to Aswath Damodaran’s videos on youtube, you will understand.

[Sorry if this is not the right place. Mods can delete]

[uditvd]

Some interesting analysis -

1. Screened 1000 cr < M cap stocks with following criterion -
   a. Avg ROCE growth for last 7 years > 25%
   b. Avg Sales growth for last 7 years > 10%
   c. Avg Profit growth for last 7 years > 10%

Ranked the above list as per current Mcap, 3 year Mcap and 5 year Mcap
Have removed names which haven’t moved much (except top 2)

[Gautam_Redmi1s_mobil]

Dear Harsh,

I am trying to get the current CCP list based on twin filters ( ROCE and Sales Growth) .

I use Screener.in but i feel the Book stress on filters with “Every year” not CAGR . so please share how we can get the list where this twin filters meet every year .

Thanks,
Gautam

[grovmo]

Hi - you could use something like below with a filter each for 3,5,7 and 10 years, at the moment it gives just 46 companies :-

Sales growth 10Years > 10 AND
Sales growth 7Years > 10 AND
Sales growth 5Years > 10 AND
Sales growth 3Years > 10 AND
Sales growth > 10 AND
Average return on capital employed 10Years > 15 AND
Average return on capital employed 7Years > 15 AND
Average return on capital employed 5Years > 15 AND
Average return on capital employed 3Years > 15 AND
Return on capital employed preceding year > 15 AND
Return on capital employed> 15 AND
Market Capitalization > 350

[Gautam_Redmi1s_mobil]

Thank you so much for quick response.

Yes i am currently using those filters and individually looking into the sales growth every year. Noticed there are few years where the Sales growth of 10% increase is missed. so have to manually weed out those entries.

[bhaskarjain]

Dr Lal, Sheela and Eris are all few years old listing. How did 7 years filter pass on them.

[uditvd]

Screener has their details from 2011, 2012, 2012 respectively