Coffee Can Investing Vs Mutual Funds – Which is better option?

Coffee Can Investing Vs Mutual Funds - Which is better investment optionCoffee Can Investing Vs Mutual Funds – Which is better investment option?


There are several investors who invest in stocks or mutual funds. Some keep on churning their portfolios, i.e. frequent buying and selling of stocks while some keep the stocks for long periods. Some invest in a variety of mutual fund portfolio to try their luck. There is another set of investors who invest based on Coffee Can Investing Portfolio approach? What is Coffee Can Investing?  How Coffee Can Investing has become famous in USA? Among Coffee Can Investing Vs Mutual Funds, which is better investment option in India? How to get the most out of Coffee Can Investing approach?

Also Read: Best SIP Date for Mutual fund Investments

What is Coffee Can Investing?


Coffee Can Investing refers to long term investment or ‘buy and forget’ approach where funds are invested in companies that perform consistently  well and forget the for a long time. The investors build a portfolio of some well-performing stocks, invest in them and forget for long time duration, say 10 years or more. Some experts say that this type of investment fetches you more than keep rotating your portfolio. 

How Coffee Can Investing has become famous in USA?


The concept of Coffee Can Portfolio has its root vested in Old West America where people used to hide their valuables in the coffee cans and then the coffee can was put under mattress to be kept for years or even decades. In the year 1984, a portfolio manager, Robert Kirby suggested that investors should follow this approach. The investor should identify a diversified portfolio of consistently performing companies, invest in their stock and stay invested for at least 10 years.

In the context of United States, it has highly developed equity markets where around 50% of the individuals invest in mutual funds. And, not only that, they maintain 10 times balance in mutual funds than savings bank account. Due to huge sums of money being invested in equity markets, extensive research on stocks, a large number of big public companies, it has become difficult for portfolio managers to create any extra return (alpha) from active investments. Individuals shifted to passively managed funds, index funds and Coffee Can Investing to avoid the expenses of fund management. This way, Coffee Can Investing gained grounds in the U.S.

In the Indian context, it may be not that popular because actively managed equity funds have beaten their benchmarks by as high as 10-15%. Hence, investing in mutual funds is still a better option for India. 

Coffee Can Investing Vs Mutual Funds – Which is better investment option?


1) Investing in Quality companies


Only a few companies meet the criteria of Coffee Can Investing in India. Out of the 50 top-rated companies, only 10% can said to be apt for such investment. For Coffee Can Portfolio (CCP), one needs to select a company with at least 100 Crore of market cap. Amongst them, again short list those that have been around in the market for 10 years and at least 10% revenue growth and 15% return on capital employed for each past 10 years. It is very an intricate task to pin-point such companies in India. On the other hand, the fund manager would manage to churn the portfolio and keep investing in stocks that may outperform.

2) Probability of investors to sell their shares


A portfolio created by investing in the companies with the criteria of Coffee Can Investing might have outperformed Sensex by 5-10% in last 15 years, but during the phase of stagnation in  a specific stock or bear period, most investors tend to sell the non-performing stocks. This kills the entire purpose of Coffee Can Investing.  On the other hand, most of the mutual fund managers would invest for medium to long term which can help to get higher returns.

3) Performance of CCI and Mutual Funds


If we draw a comparison between returns from a Coffee Can Investing and returns from mutual funds, we find that CCP gives 5-7% annualized return, whereas actively managed mutual funds have constantly beat their benchmarks  by as high as 8-12%. 

4) Cost of investing in CCI and mutual funds


There are several stock brokers which are offering 0.1% to 0.75% fee when you buy or sell stocks. On the other hand, the biggest disadvantage of actively managed mutual funds is that they charge considerable fees. Some funds have a front-end load or back-end load/brokerage commission, which is basically a fee paid for investing or disinvesting in the fund. Some funds typically charge an expense ratio, which at times may be in excess of 2%. At the end, all the investors are collectively paying huge sums of money to the fund managers whose performance may be average sometimes.

Conclusion: Coffee Can Investing is a good investment concept, but very few investors succeed in it due to lack of financial expertise and investor bias. If someone is determined to invest in it, then he is must not invest more than 10-15% of his investment corpus in such concept.

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Suresh

Coffee Can Investing Vs Mutual Funds – Which is better investment option

The Author

Suresh KP

Suresh KP i.e. me have written 1,800+ articles on this blog. I have done by B.Com from Osmania University and then MBA-Finance from Symbiosis University, Pune. I have over 20 years of experience in analyzing various investment options and money saving ideas. I love doing financial planning, Mutual Fund Analysis, Searching long term Stocks for wealth creation, IPOs, reviewing Insurance Products, analysing Health insurance Plans etc.

18 Comments

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  1. Do you have any views on smallcases? I heard about it via Zerodha, but now see that they are becoming available on other brokers.. Is it low-cost and transparent as they claim? While I’m not a fan of their coffee-can portfolio, I feel they have some interesting strategies/options – thoughts?

    1. It is good idea, let me write an article about this next week. Can you pls post this topic on suggest a topic so that I would not miss this. Thank you.

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