The coffee can portfolio is a strategy built on one decision. You buy a stock. That’s it. It eliminates the difficult task of selling.
Robert Kirby envisioned the strategy after a client approached him. He had worked with the client for about a decade when she called. Her husband had suddenly died and she wanted to add his portfolio to hers so Kirby could manage it. As Kirby looked over her husband’s portfolio he was somewhat shocked and surprised by it. The husband not only cloned his wife’s portfolio but handily outperformed it.
Every time Kirby made a recommendation to buy a stock for the wife’s portfolio, the husband followed it too. Each time, he invested about $5,000 into the stock. But when Kirby made the recommendation to sell, the husband ignored it. Every time he bought a stock, he tossed the stock certificates into a safe deposit box and did nothing.
After a decade, with a growing pile of stock certificates, the husband’s portfolio became a weird mix of stocks. Many were worth less than the original $5,000 investment. A few were worth more. A lot more in fact. A handful were in excess of $100,000 and one small investment in Xerox exceeded $800,000.
Here’s how Kirby described it:
The Coffee Can Portfolio harkens back to the Old West, when people put their valuable possessions in a coffee can and kept it under the mattress. The coffee can involved no transaction costs, administration costs, or any other costs. The success of the program depended entirely on the wisdom and foresight used to select the objects to be placed in the coffee can to begin with.
Nothing guarantees that the coffee can approach will produce a decent return, much less a multi-bagger like Xerox. That’s not the goal. The goal is to eliminate the costly activity of moving in and out of the market. Because, with investing, more activity typically leads to worse results. As Kirby showed, doing nothing outperformed a more active strategy.
Of course, the coffee can approach has a few other advantages too:
- By removing the decision to sell you eliminate the hardest part of investing (in my opinion) because worrying about selling often gets in the way of making real money. As Kirby’s example shows, not every investment has to make money in order for the portfolio to make money. A handful of winners can easily make up for all the losers and then some.
- It reinforces savings. Since you only buy, you’re forced to save before you buy the next investment.
- Fewer taxes to worry about. The advantage of never selling means never getting hit with capital gains tax. Taxes are a drag on returns. Reducing that drag leads to better long-term returns. (Dividends may still be an issue but proper use of tax-advantaged accounts can cover that.)
- It reinforces long-term investing. Anything that pushes against the short-term nature of markets tends to work in the investor’s favor. Of course, investing with a decade in mind means not having to worry about or guess what the market does in the next six months.
- If forces selectivity. The strategy reminds me of Warren Buffett’s punch card approach. You’re given a punch card with 20 slots on it, one investment per slot, for the rest of your life. How do you decide how to use it? Hopefully, you put some thought into how to use each slot. It should force you to think about investments that might work well over the next decade or two. This means the strategy favors small companies with the potential to become big market leaders or existing market leaders likely to maintain their advantage in their industry, especially if they have a long history of paying and raising dividends. Due to the longer time horizon, the price you pay matters but the quality of the company matters more.
- It encourages patience. The extended time horizon and selectivity require it.
- It limits action. Doing nothing is never easy but it has advantages, as pointed out by Kirby. The temptation to act is ever-present. And every market cycle has periods where the urge to do anything overwhelms the advantages of doing nothing. Of course, action can lead to overtrading, which is a proven way to lose money.
- It’s a great substitute for a “play” account. Most play accounts are described in a way that basically gives people a pass to gamble in the markets. The coffee can portfolio encourages investing while offering some action.
The brilliance of the coffee can portfolio is it makes every investment a one-decision game. In the process, it limits the typical costs of investing. Not just transaction costs either. It limits the behavioral costs that come with being able to trade in and out of the market.
The Coffee Can Portfolio
- A Memo to Investors – Albert Bridge Capital
- Levered Work, Balanced Sheets – Kreuger & Catalano
- What to Do When the Market is Manic – Morningstar
- Are We In a Stock Market Bubble? – R. Dalio
- Charlie Munger: Daily Journal Annual Meeting (video) – Yahoo Finance
- Jeremy Grantham: A Historic Market Bubble (podcast) – Investing Like the Best
- The Tortoise, the Hare, and the Snail – Klement on Investing
- Uncertain Decision Making and the Maximax Criterion – Reaction Wheel
- Persuading the Unpersuadable – HBR
- Chewing Gum: Marketing That Sticks – Tedium
- 10 Breakthrough Technologies 2021 – MIT Tech Review