Coffee Can Investing – The Indian Approach

Coffee Can Investing is a brilliant book written by Saurabh Mukherjea, Rakshit Ranjan and Pranab Uniyal. While I am a big fan of Saurabh Mukherjea and almost follow him extensively on various news channels and articles, both Rakshit and Pranab are also really well versed with the subject (their media appearances are a little limited).

Here’s a 2 hour long link to the video where all three talk about this in detail:

The presentation by the authors start from 16:02.

A brief Summary

As the books talks about, Coffee Can Investing is the low risk route to making stupendous wealth. The idea in short is to buy great companies and hold them for 10 years without engaging in active buying / selling. At the end of the ten years, you would have certain stocks that would have been flat, some would have lost 90–95% of their value whereas there would be 2–3 outperformers who would have given you a strong outperformance both at an individual and a portfolio level making your portfolio have an outperformance of giving you a return of 10x in 10 years.

How do I pick great companies?

You put the following three filters in picking up stocks from the entire universe of listed stocks:

1. The Company should have been in existence for at least 10 years – The idea is, an economic cycle generally lasts for 5 years where there is a boom followed by a contraction in demand, slowdown, uptick and then finally a boom. A company that has survived through these 10 years speaks volumes about the management efficiency and experience in taking it to further heights.
2. Revenue growth of at least 10% Year on Year and not CAGR or SAGR (Compounded Annual Growth Rate / Simple Annual Growth Rate) – Inflation in the country has always been in the range of 6–8%; there could be cases where it has gone below and also gone above. The idea is, as a rule of thumb it has been in that range. If the company manages to grow its revenues by at least 10% for 10 consecutive years – it has beat inflation on all those 10 years stating that the company has real pricing power. This should not be mistaken with CAGR or SAGR whereby you grow your revenues by 6% in one year and then 25% in one year but on a CAGR / SAGR level you have done more than 10%. The idea is, you do 10% Year on Year.
3. Return on Capital Employed (ROCE) of at least 15% for 10 years Year on Year – ROCE or Return on Capital Employed is the single best ratio one should look at to know what is the company doing in terms of its profitability and prudent capital allocation. To understand ROCE, it is prudent to understand the Cost of Capital (Kc). These two financial jargons have always been around and confused people both from the financial and non – financial world. To put it simply, Cost of Capital is the rate at which you take money – either your own (Cost of Equity) or through debt i.e. a charge / cost of putting capital in the business. While interest appears in the financial statements as a charge on debt, the cost of equity does not feature explicitly on the financial statements. A Weighted Average Cost of Capital (WACC) in the country roughly hovers between 10–13% considering any prudent mix you take between debt and equity. If ROCE is at least 15% for 10 years, that means from a business perspective, you are getting returns higher than your charge / cost on the capital. I shall attempt to write on ROCE in detail as a separate post, but as of now – let’s keep it to dhandha’s return (Dhandha is Business spoken in Hindi).
4. Market Capitalization > 100 Crores – Saurabh argues that this filter has been put to exclude more than 70–80% of the listed companies. Also, the company should be of a certain size to be considered investible.

After putting these four filters, you are left with a limited number of 15–20 stocks to narrow down on.

The authors have back tested this data by creating Coffee Can Portfolios from the Years 1996 to upto 2006 creating a list of 10 complete Coffee Can Portfolios (CCPs). In all the cases, there has been significant out-performance to Sensex in each of the CCP constructed for each of the 10 year periods.

Other Thoughts

The authors have also attempted at addressing other areas and common myths that Indians have about investing and personal finance in general. While it is important to have a prudent asset allocation while investing across various asset classes depending on your appetite for risk and your goals. When it comes to the equity bucket, it is important to have a mix between a Good Large Cap Mutual Fund, ETF and a Coffee Can Portfolio using the mix of the above factors.

The Book on Coffee Can Investing

The book is a must have for anyone attempting to get an understanding of how investment / personal finance works in the Indian context or anyone who is at an advanced stage of understanding about investments.

The book can be bought from Amazon here.

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