The coffee-can approach

But there is surely some young person in your life whom you can share the wisdom of long-term investing with. Tell them about the coffee-can idea ... .Make them wise to the ways of Wall Street.

Chris Mayer, 100-Baggers, p.21

I came across the coffee-can portfolio concept while reading Chris Mayer’s wonderful book, 100-Baggers. According to Mayer, the concept originated with Robert Kirby in 1984. He was a portfolio manager at Capital Group and wrote about the idea in the Journal of Portfolio Management: “‘The coffee can portfolio concept harkens back to the Old West, when people put their valuable possessions in a coffee can and kept it under the mattress… The success of the program depends entirely on the wisdom and foresight used to select the objects to be placed in the coffee can to begin with.’” (p.15)

The idea is simple: you find the best stocks you can and let them sit for 10 years. You incur practically no costs with such a portfolio. And it is certainly easy to manage. The biggest benefit….it keeps your worst instincts from hurting you. …[It is] designed to protect you against yourself – the obsession with checking stock prices, the frenetic buying and selling, the hand-wringing over the economy and bad news. It forces you to extend your time horizon. You don’t put anything in your coffee-can you don’t think is a good 10-year bet.

Chris Mayer, 100-Baggers, p.16

This is the one portfolio (or strategy if you prefer to think about it that way) that I will continue for as long as I’m in the game. It aligns with my personality, and it’s the only surefire way I know of to build a low-maintenance compounding machine that has a chance of generating above-average returns over long periods of time.

How it works:

1. Assemble a concentrated portfolio (< 20) of high quality businesses with lots of room for growth run by Outsider-like management, purchased at “very attractive prices.”
2. Plan to hold them for at least a decade.
3. Sell only when the underlying business no longer meets your quality standards.

Why it works:

1. It's tax efficient.
2. It's cost efficient.
3. It's easy to manage.
4. It's designed to protect you against yourself.
5. It forces you to extend your time horizon.
6. It requires you to think like an owner, not a speculator.
7. It's the opposite of what Wall Street does.

Why it's difficult:

1. Selecting the right companies can be the hardest part, especially if analyzing companies and investment opportunities isn’t your full time job. It takes time to get to know a business, to understand its competitive advantages or lack there of. It takes an ability to imagine a future that’s vastly different from the consensus view. You aren’t looking for companies that are selling for 10% less than you think they’re worth. You’re looking for compounding machines that are worth way more than their sticker price. Way more.
2. Holding on can be the hardest part:
1. Buffett bought Disney stock at a split adjusted price of $0.31 in 1965, and sold it in 1967 at $0.48 cents per share. A 55% gain in only two years…but what a costly sale. Today, the stock is trading around $95, and traded as high as $197 [at time of writing]. p.24
2. Apple, from its IPO in 1980 through 2012 was a 225-bagger. But, “those who held on had to suffer through a peak-to-trough loss of 80 percent–twice!” p.24
3. “Netflix, which has been a 60-bagger since 2002 [at time of writing], lost 25 percent of its value in a single day–four times! On its worst day, it fell 41 percent. And there was a four month stretch where it dropped 80 percent.” p.24
3. Even the best investors in the world will tell you you need a little bit of luck along the way.

Evidence it works:

1. Buffett & Munger built the ultimate compounding machine in Berkshire Hathaway, compounding returns at 20.1% annually vs ~10.5% for the S&P 500 total return since 1965. Their approach? Buying quality businesses run by able management at “very attractive prices” and holding them for long periods of time.¹ Their long-term thinking has yielded a staggering ~3,600,000% return since 1965. A $100 investment in 1965 would be worth over $3.6M today. A (deep breath) “36,000-bagger.”
2. Nick Sleep & Qais Zakaria ran the Nomad Investment Partnership and delivered a compound annual growth rate of approximately 20.8% net of fees over its 13-year lifespan. This far outpaced the MSCI World Index, which returned approximately 6.5% CAGR during the same period. Their approach? They referred to their investment style as “destination analysis,” emphasizing the long-term potential of businesses rather than short-term market fluctuations. They held a small number of high-conviction investments, often focusing on companies with exceptional business models, strong competitive advantages, and the ability to reinvest capital at high returns. $100 invested with them would have turned into $965 over the 13 year period. A “9-bagger.”
3. Alternate Universe Michael: My original Apple investment in 2008 would have been a “64-bagger.” A $100 investment would be worth ~$6,400. (Alas, mine was worth $80 when I sold)