Coffee Can Investing by Robert G Kirby

The best conversations are over a cup of tea or coffee with friends. It was one such cold winter morning of 2010 when I was meeting an old friend over a cup of cappuccino. During our conversation, he told me about this interesting paper written by Robert G Kirby in 1984 on a concept called The Coffee Can Investing. A strategy, that appear to work very well, but rarely used by investors.

I went back home and read the paper. That was the day I learned something new in the field of investing. Robert G Kirby called it "The Coffee Can portfolio" since it reminded him of a time in the Old West in America when it was common for people to put their valuable possessions in a coffee can and keep it under the mattress. Since this approach involved no transaction costs, administrative costs, or any other costs., the value of the coffee can in the long term was entirely dependent on the wisdom and foresight used to select the objects to be placed in the coffee can, to begin with.

In his paper, Kirby told the story about how his idea came about. “The coffee can idea first occurred to me in the 1950s,”. He worked for a big firm that counseled individuals on their investments then. He had a client whom he had worked with for 10 years whose husband died suddenly. She inherited his stock portfolio, which she moved to Kirby’s care. Looking at the portfolio, Kirby writes, “I was amused to find that he had been secretly piggybacking [on] our recommendations for his wife’s portfolio. Then I looked at the size of the estate. I was also shocked. The husband had applied a small twist of his own to our advice: He paid no attention whatsoever to the sale recommendations. He simply put about $5,000 in every purchase recommendation. Then he would toss the certificate in his safe-deposit box and forget it.” In doing this, a wonderful thing happened. Yes, it meant his portfolio had several stocks worth $2,000 or so – small positions. But he also had a few large holdings worth $100,000 each. The kicker, though, was this: He had one jumbo position of $800,000. As Kirby writes, “[It] came from a small commitment in a company called Haloid; this later turned out to be a zillion shares of Xerox". It is an inspiring tale, a triumph of lethargy and sloth.

The Coffee Can approach is designed to protect investor from himself - buying and selling of stocks regularly as 24x7 business media & social media channel creates extreme pressure on our minds to act. With Coffee Can approach, an investor will be forced to extend his time horizon to 10 years. It will also makes the investor think what is he putting in the coffee can and may be forced to buy stocks which have proven track record with a potential of much greater earning power in the future and durable businesses which are likely to maintain their moat over the next 10 years. It is the ultimate BUY and HOLD portfolio. This approach not only saves transaction cost but prevents selling of stocks during volatile market conditions. In a long run, these stocks should give higher returns than the market returns. However, the success will depend on choosing the right stocks.

From an Indian context, I strongly recommend you to read the book "Coffee Can Investing: the low risk road to stupendous wealth" by Saurabh Mukherjea, Rakshit Ranjan, Pranab Uniyal. The book will show you how to go about low-risk investments that generate great returns. This is the simplest portfolio management theory I have come across and have greatly benefitted. My biggest learning from reading the Coffee Can Investing paper was that "I was taught from a very young age that Effort = Result. But, in the field of long term investing, this equation does not apply" It is awfully hard work doing nothing. - Oscar Wilde