Book Review: "Coffee Can Investing: The Low-Risk Road" – A Comprehensive Guide to Building a Winning Stock Portfolio

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Stock investing is often considered a high-risk endeavor. Many people are concerned about the possibility of losing their principal and capital. Some view it as a game of chance where you can either make it big or lose everything. But is there a way to pursue substantial wealth with lower risk? If such a path exists, wouldn't you want to know more about it? That's precisely what we'll discuss in this blog.

An Insight into "Coffee Can Investing: The Low-Risk Road"

Let’s review the book "Coffee Can Investing: The Low-Risk Road" – A comprehensive guide to building a winning stock portfolio. Immerse yourself in the wisdom of the Coffee Can Investing book through the combined expertise of Saurabh Mukherjea, Rakshit Ranjan, and Pranab Uniyal. With eight engaging chapters, this book provides a roadmap for creating a portfolio that can lead to significant wealth accumulation over time.

Let's get started. The first chapter unfolds with two intriguing stories. One of them centers around Mr. Talwar, a seasoned corporate executive in his fifties. Throughout his life, he has explored various investment options, from real estate to gold, and even equity trading. As he approaches retirement, a sense of dread creeps in. Whether he has all the money that he needs. 

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Chapter 1 - Mr. Talwar’s Uncertain Future

Similarly, there's also the tale of Sanghvi, a businessman who has enjoyed a lavish lifestyle and is now facing the sale of his factory. He's contemplating how to sustain his high life in the future. The theme of making long-term investments for desired returns is intertwined with these narratives.

Chapter 2 - Coffee Can Investing

The second chapter of the book introduces the concept of coffee can investing, a term popularized by Robert Kirby and adopted by Capital Guardian Trust Fund in 1965. Kirby shared a story in a 1984 newsletter about a client's husband who faithfully followed his stock recommendations for a decade without ever selling them. Over a decade, Mr. Kirby revealed that the investment portfolio had yielded remarkable profits for the individual. The key takeaway here is that by investing in solid companies for the long haul, you have the potential to amass significant wealth.

The concept of "coffee can investing" traces back to the Wild West era in the US, where people safeguarded their money by stashing it in a can of used coffee beans under their mattress before banks were established. This strategy serves as a blueprint for selecting stock portfolios. 

How To Choose The Stocks For The Portfolio - A Checklist

Within the pages of the book, the authors break it down using a checklist approach, highlighting the top five checklist items.

• To begin with, any investment you decide on should have a minimum term of ten years. Align yourself properly to meet the timeline requirements.
• Make sure the company you select has consistently achieved a return on capital employed of at least 15% annually for the past decade.
• The company must have experienced a growth of at least 10% in gross revenue annually for the past ten years.
• When selecting a company, it's essential to consider its perceived brand value and ensure it has strong governance in place. The management quality should be of the highest standard.
• It's always impressive to see companies with a solid business moat or competitive advantage that makes it difficult for others to compete with them.

When choosing which companies to invest in, make sure to consider these five important factors. By incorporating these factors into your stock portfolio, you increase the likelihood of finding that elusive multi-bagger you've been searching for.

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Chapter 3 - Expenses - Cost Minimization, Types Of Funds

The third chapter focuses on expenses, emphasizing the significance of maximizing profits and minimizing costs. The author stresses that optimal results can only be achieved when profits are high and costs are low. Therefore, it is crucial to sift through the details of investment options. Nowadays, we are bombarded with various investment schemes, ranging from high-cost insurance savings products to nearly cost-free options.

1. AIF

He discusses the importance of selecting the correct investment products. For example, if you are involved in portfolio management services or an AIF, the cost of the reserve fund manager is visible due to the high returns the fund aims to achieve. Naturally, these costs may be slightly higher than usual.

2. Active Mutual Fund

Next in line is an active mutual fund, which typically charges around 2% due to the presence of a fund manager who oversees the portfolio and requires a professional fee. Below the active mutual fund is a passive mutual fund.

3. Passive Mutual Fund

Passive mutual funds are more cost-effective compared to active mutual funds since they don't have a fund manager and simply track an index. This leads to significantly reduced overall costs.

4. Exchange Traded Fund (ETF)

Finally, there's the exchange-traded fund, which is similar to a stock. The cost of an exchange-traded fund is the lowest, and it all depends on your needs, risk appetite, and long-term investment goals. You should consider your options and choose the best one, or a combination, to maximize returns and minimize costs. 

It's essential to pay attention to expenses, similar to how a small leak can cause a boat to sink. Monitoring boat expenses is key to ensuring smooth sailing.

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Chapter 4 - The Real Estate Trap

The fourth chapter discusses the risks associated with real estate investments, with the authors expressing a strong disapproval of such ventures. They argue that the golden era of real estate returns has come to an end. Mr. Talwar and Sanghvi's real estate investments have not yielded the expected returns, as discussed in detail by the authors. It is common knowledge that real estate lacks liquidity, making it challenging to access funds quickly even if the property value is high. Trying to sell a property valued at a crore rupees for 10 lakhs may prove to be a tough task. 

It's not possible to sell just a part of your property; you have to sell the whole thing. This turns it into an illiquid asset, leading to a lack of transparency. The value of the same property can vary depending on its location, resulting in geographical distortions in valuation. Furthermore, due to the high cost of purchasing property, it’s not possible to simply buy something worth 10,000 or 15,000; you have to invest in properties worth lakhs or crores. The cost of acquisition is undeniably high. 

The cash flow from rentals doesn't offer a great return and falls short of what you'd earn from a basic savings account. It looks like the authors are convinced that real estate, once a popular investment choice, isn't the best way to invest anymore. Besides having a place to live, real estate can be a tricky investment that doesn't always lead to wealth accumulation.

Chapter 5 - Small Is Beautiful

In chapter five, the authors emphasize the benefits of embracing the "Small is Beautiful" philosophy, backed by data that highlights the potential for significant growth and returns when investing in small-cap companies or small-cap mutual funds from an early stage. 

Certainly, that's when the company starts to gain recognition, and its processes become more intricate. Investors can achieve impressive returns by staying invested in a small-cap fund or stock over a long period. However, it's easier said than done. Why? Well, small caps are known for their high volatility, often experiencing substantial fluctuations.

Many average investors may feel scared and lack the resilience to hold onto such investments, especially in a market that's constantly changing. Furthermore, small-cap stocks often lose their momentum, ultimately becoming failures. Small-cap stocks may not offer the liquidity you expect, making it challenging to sell them when the time comes. This could result in a dramatic decrease in their value, posing a risk to your investment. Despite the risks involved, investing in small caps can be an exciting way to potentially grow your wealth over five or ten years.

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Chapter 6 - How Patience and Quality Intertwine

However, there are many risks involved in this venture. These risks must be approached with caution. The upcoming chapter will focus on the human factor. Even though the markets offer potential returns, do we possess the patience and mindset required to handle those returns? Investing in equity markets does not ensure a consistent return like a bank account or fixed deposit. Returns can fluctuate in various ways, sometimes leading to a steep decline in your portfolio. It's crucial to remain patient and wait for the market to bounce back, eventually providing the returns you desire. Building wealth requires both patience and the right temperament, which can be challenging to maintain.

Chapter 7 - Pulling It All Together

In the next chapter, he highlights the significance of constructing a portfolio that aligns with your financial objectives using a well-thought-out financial plan. This strategy will help you maintain discipline and work towards achieving your goals. Stocks are investments for the long haul. If you're in it for the long run, say 10 or 15 years, viewing stocks as an asset class is key to reaping the rewards. Remember, quality investments always come back to reward you. So, do your research, invest in top-notch stocks or portfolios, and stay the course for returns that won't disappoint.

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Pros and Cons of the Book Coffee Can Investing: The Low-Risk Road

The main focus of this book is to offer you a comprehensive framework. It provides an in-depth exploration of various portfolios. Although there are many texts to choose from, I have a specific advantage and disadvantage to share about this book. This book is perfect for anyone seeking to learn the ropes of stock picking or selecting mutual funds. It offers a valuable framework for doing so. The framework it offers is essential, but I also view it as a downside. The book praises equity, which is indeed a powerful asset in building wealth. However, I believe it focuses too much on equity and overlooks other valuable asset classes such as real estate and gold. 

This book was written in 2017, which was almost eight years ago. During these eight years, there has been a significant surge in the value of gold. If this book were written today, the content might have a different perspective. In the past, gold was not considered a valuable asset, but in the last five years, we have witnessed its remarkable performance. Although this book may not be up-to-date as a reference point, the framework for equity stock picks it provides is still useful. I suggest you grab the book and read it with that perspective in mind.

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