With the Indian markets outperforming the global markets, the Indian investor still stands a chance to bask in the huge growth potential it has to offer. As an investor, it is only that you are aware of different ways of investing in the Indian markets.
Coffee Can Investing is one of them. Yes, you heard it right. We will get to see what Saurabh Mukherjea, CEO of Ambit Capital, one of India’s largest wealth managers, has to offer.
Common Investment Mistakes
‘Risk comes from not knowing what you are doing.’ —Warren Buffett
Saurabh starts the book with a storyline of Mr. Talwar. The story revolves around every other Indian family that takes pride in a job, marriage, and home.
Investments were in the form of fixed deposits and physical gold in the late 1900s. There was hardly a small percentage of Indians who invested in the stock markets wisely.
Just like every other person who starts his investment journey, Mr. Talwar did so as well. People who invest based on tips or during teatime gossip end up making the same mistakes over and over again. Here are some common mistakes any investor would relate to.
Chasing short-term gains.
The thrill of timing the markets.
Ignoring high commissions & fees.
Ignoring taxes & inflation.
Throwing all eggs in one basket.
No objective or long-term vision.
Trading instead of investing.
Coffee Can Investing
‘For indeed, the investor’s chief problem—and even his worst enemy—is likely to be himself.’ —Benjamin Graham, The Intelligent Investor
Saurabh gives references to Benjamin Grahm’s book “The Intelligent Investor” to start talking about the subject. Citing that not only ignorant people lose money in the stock market but the learned lot do too.
He references Sir Issac Newton’s adventure in the stock market to showcase the truth you cannot discard.
Mr. Talwar and Sir Issac Newton were both intelligent and smart people, but they made the same mistakes an investor who lacked knowledge of investing does.
Successful equity investing hinges on two simple questions, which are to answer.
Which stocks should I buy?
For how long should I hold the stocks I bought?
Coffee Can Investing has its origin in the United States, which introduces us to the buy-and-forget theory. However, it is not as simple as the theory sounds.
Warren Buffett explains that the kind of companies he likes to invest in are companies that have
A business we understand.
Favorable long-term economics.
Able and trustworthy management.
Sensible price tags.
Building the Coffee Can Portfolio
Saurabh says to truly become rich, an investor has to let a sensibly constructed portfolio stay untouched for a long period. That’s the simple yet difficult-to-achieve principle of Coffee Can Investing.
He shares some of his insights on creating one with the bare minimum aspects one must cover. There is a lot more in-depth research that goes into it, which you may not find in the book for obvious reasons.
The minimum market capitalization of 100 crores.
Companies that have shown growth in sales each year for the past decade.
Have generated a return on capital employed (ROCE – pre-tax) of at least 15%.
A loan growth rate of at least 15% for banks indicates the bank’s ability to lend over business cycles.
A 26 percent return per annum run rate results in the portfolio growing in size to ten times in ten years, 100 times in twenty years, and 1000 times in thirty years.
Saurabh says a critical feature of the Coffee Can Portfolio is that it holds companies for a minimum period of 10 years. The precedent for these companies is still from the base criteria of ROCE above 15% and revenue growth of over 10%.
The following are 4 compelling factors that stand out and go against churn in a portfolio of great companies.
Higher probability of profits when held for longer periods.
Power of compounding.
Avoids short-term noise.
Transaction costs.
The author says that Coffee Can Portfolio is skewed toward certain themes, given the desire for longevity and consistency of performance. The Coffee Can Portfolio is oriented towards the following themes.
More B2C (Business to Consumer) than B2B (Business to Business)
More structural rather than cyclical plays.
The Intricacies of Investing
Expenses you pay while Investing are an important aspect that can make a difference in actual returns in hand. This is one aspect that investors tend to ignore. An investment of one lakh with an expense ratio of 2.25% and that of 0.1% makes a world of difference.
Just like your investments compound, your expenses do in the long run. Fund expenses and advisory services make a lot of difference in what you make when you invest in direct funds. It makes more sense to invest in passive funds or ETFs instead.
Real Estate is a trap for various reasons when it comes to investments. The investment size is considerably bigger compared to stocks or bonds, and their transaction costs are also huge.
Real Estates are illiquid when compared to other financial assets like bonds, stocks, or for that matter, physical assets like gold or silver. Their transaction costs and lower returns over longer periods make them a far less exciting investment bid.
Is Small beautiful?
Smaller companies have the potential to grow much faster than their counterparts, large caps. This is simply because of the reason that they are yet to be discovered or are in the limelight.
Profits of small-cap companies grow faster than large-cap companies when credit availability is not scarce, the economy is accelerating, and several competitors are undervalued as well.
Quality and patience pay
Saurabh strongly believes that normal investor loses money in the equity market because they lack the patience to even hold their stocks for a year. The more often you churn your portfolio, the shorter horizon you see for your investments. Wealth is not created with a short-term vision in place.
There is no doubt in the fact that higher-quality stocks in your portfolio generate better returns on investments. A high-quality portfolio with a very long holding period delivers the highest return with the lowest risk.
‘Never forget that risk, return, and cost are the three sides of the eternal triangle of investing.’1 —John C. Bogle,
Conclusion
The essential link between your investment style and your financial objective is made through financial planning. The buy-and-forget investment principle sounds simple.
This book clarifies some concepts that help you build a sound foundation before investing.
You can get your copy of the book here for more in-depths into these concepts
(Amazon paid link)
Guest Post - Written by Mr. Lal Bajaj, Bangalore
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