The Coffee Can Portfolio
A few weeks ago I was engaged in one of my favourite activities,
browsing through a used bookstore. My search was rewarded when I
found "Classics: an investor's anthology" which was edited by Charles
Ellis and published in 1989. The book contained a variety of articles
written by investment heavyweights in the last century. Apart from
articles by Benjamin Graham and Warren Buffett, I was most influenced
by Robert Kirby's discussion of the Coffee Can Portfolio which was
first published in the Journal of Portfolio Management in 1984.
Robert Kirby thought that investors would be well served by
purchasing small amounts of many stocks and then forgetting about them
for ten years. While discussing his investment counsel business he
related an interesting anecdote.
"I had worked with the client for about ten years, when her husband
suddenly died. She inherited his estate and called us to say that she
would be adding his securities to the portfolio under our management.
When we received the list of assets, I was amused to find that he had
secretly been piggy-backing our recommendations for his wife's
portfolio. Then, when I looked at the total value of the estate, I
was also shocked. The husband had applied a small twist of his own to
our advice: He paid no attention whatsoever to the sale
recommendations. He simply put about $5,000 in every purchase
recommendation. Then he would toss the certificate in his
safe-deposit box and forget it.
Needless to say, he had an odd-looking portfolio. He owned a
number of small holdings with values of less than $2,000. He had
several large holdings with values in excess of $100,000. There was
one jumbo holding worth over $800,000 that exceeded the total value of
his wife's portfolio and came from a small commitment in a company
called Haloid; this later turned out to be a zillion shares of Xerox."
I found the article to be appealing because I know many people
who became wealthy following a similar approach. On the other hand, I
know of very few who have succeeded by following their broker's
advice. Anecdotal evidence for sure, but there are other reasons to
consider putting stocks into a safe-deposit box and forgetting about
them for a decade.
Simply deciding that you'll hold a stock for ten years makes a
big difference. The prudent long-term investor will select stocks of
profitable companies with little debt. This list can then be pared
down by removing companies that produce products that are unlikely to
be in demand throughout the next decade. Such an approach
automatically steers investors away from risky companies with limited
operating histories and unproven businesses.
The Coffee Can approach is almost custom-made for the dividend
reinvestment plan (DRIP) investor. The only downside is that there
are relatively few Canadian companies that offer dividend reinvestment
plans. As a result, investors should exercise patience when building
a DRIP portfolio and expect to buy only a handful of reasonably priced
stocks each year.
Overall, the Coffee Can approach holds great appeal because it
doesn't cost much to maintain, it defers taxes and requires relatively
little effort.
First published in June 2002.
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