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108 - Coffee Can Portfolio Investing

The DIY Investing Podcast

Release Date: 01/24/2021

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108 - Coffee Can Portfolio Investing show art 108 - Coffee Can Portfolio Investing

The DIY Investing Podcast

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.

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104 - Terminal Value and Why Intrinsic Value grows over time show art 104 - Terminal Value and Why Intrinsic Value grows over time

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102 - Don't use Enterprise Value - Here's Why show art 102 - Don't use Enterprise Value - Here's Why

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More Episodes

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.