108 - Coffee Can Portfolio Investing

Mental Models discussed in this podcast:

• Deferred Tax Liability
• Skin-in-the-game

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Show Outline

The full show notes for this episode are available at https://www.diyinvesting.org/Episode108

Coffee Can Portfolio

• Seeking "Never Sell" stocks - only certain companies qualify
• Benefits from a deferred tax liability (Can become quite significant over time)
• Preferable for individual investors. Hard to implement professionally

Characteristics of a Coffee Can Stock

• An industry that lacks disruption risk
  • Banking (Example)
• Stable and high returns on capital/equity (15% or higher)
• Long-term sustainable organic growth of at least 5% but preferably 10-15%. (You don't necessarily want 20%+ growers that will eventually lose all growth)
• Low competition, could be regulated monopoly or oligopoly
• Founder led company or a long-term CEO with skin-in-the-game
• Zero or low debt/leverage policies
• The ability to be a ten-bagger or a 100-bagger
  • Usually small with the ability to grow large.
  • A small competitor with a competitive advantage (cost perhaps) over larger competitors in a big market.
    • Think early Walmart, Costco, Home Depot, GEICO
• Intelligent capital allocation strategies that benefit shareholders
  • Lack of dilution
  • Growing dividends or buybacks over time (Dividend Champion type stocks)
  • Unless it is a roll-up strategy, an average to acquisitions can be helpful, because they often destroy shareholder value. 

You can't think of your stocks as a "Portfolio"

• You are a true business owner
• Judge your success by the performance of individual companies, not the overall portfolio return.
  • Logical point: If every individual company compounds at 10% per year or more, then the portfolio as a whole by definition must also compound by at least 10% per year.
• Position sizing no longer matters. Your greatest winners may eventually become 50%, 75%, or 90% of your total portfolio. That's okay. That's how the strategy works. This is how the strategy outperforms. 

How to implement a Coffee Can Portfolio (The Process)

• Buy one new stock a year, each year you work.
• Put all of your savings for the year into that company.
• Never sell.
• Ideally register for the shares in direct certificate form. It can be electronically held at a transfer agent, but after the year, don't hold the shares directly with a stockbroker.
  • This limits your ability to sell the shares and is a huge psychological boost in implementing the strategy. 

Summary:

In this episode, I discuss the coffee can portfolio approach to investing. This investing strategy involves never selling a stock once it is bought. Therefore, you must seek high-quality companies with long runways for growth and high returns on capital.