About the author;
Saurabh Mukherjea is currently the Founder and CIO of Mercellus Investment Managers, one of the leading PMS by AUM in India
Book Review;
One of the problems while investing in the Indian equity markets is the lack of research on historical performance of Indian stocks/businesses. Thus, an investor in the Indian markets has many global research/texts and applies the learnings/insights to the Indian markets. Coffee Can Investing is one of the books (hopefully one of several more in the future) focused on the Indian equity markets. The book is iconoclastic for the Indian reading it because it renounces beliefs around gold, real estate, and misbeliefs around stock investing.
The chapters I would recommend are 1, 2, and 6. Chapter 1 explains the 7 financial mistakes people generally make. The mistakes are:
- No clear investment objective/plan
- Trading too much, too often
- Lack of diversification
- High commissions and fees
- Chasing short term returns
- Timing the market
- Ignoring inflation and taxes
Chapter 2 on coffee can investing philosophy is the meatier part of the book. Robert Kirby is the inspiration for the coffee can portfolio (CCP) from his 1984 essay when Robert Kirby found out about a client who had bought shares but never sold them, which turned out to give massive returns. The idea behind CCP is to buy stocks and forget about them that would then let compounding do its magic. To construct the CCP in India the authors recommend three filters to apply on the universe of public listed stocks. The filters are:
- Market cap > 100Cr because data is not reliable for smaller companies
- Sales growth of 10% EVERY YEAR for the past 10 years
- This filter is based on India’s GDP growth rate.
- India’s GDP growth rate since turn of the 21st century has averaged around 8% so the idea is accompany should grow beyond India’s GDP growth rate on a consistent basis
- RoCE > 15 EVEYR YEAR for the past 10 years
- RoCE is return on capital employed
- RoCE is a measure of how much return does a company generate from its operations after utilizing all the capital available to it
- RoCE of 15% is to beat the cost of capital in India
- Cost of capital is the risk free rate (7-8%) + the equity risk premium (7-8%)
Chapter 6 is about the patience premium in investing. One element of the CCP investing is great companies identified by applying the above-mentioned filters. The other equally important element is patience i.e. not touching the portfolio for 10 years. The four reasons to hold on for 10 years are:
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Equity investing is volatile in the short term but over 10 year periods the gains are most likely positive
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Compounding works in your favor if quality stocks are held for a long time. Winners are responsible for most gains and losers become inconsequential
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Eliminate noise from market movements
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Reduce trading costs and taxation
The essence of CCP is outstanding returns with low levels of volatility. This might sound too good to be true, however, in investing, there is not a high correlation between effort and returns :)