Coffee Can Investing is the Ultimate Buy and Hold Strategy. Essentially, you buy great companies and then never sell them. Meb Faber has floated this idea a few times (he coined the term) and I think it’s an interesting concept. I’m putting this together for my own benefit, not as advice to anyone else, but maybe you’ll think it’s interesting.
The beauty of this strategy is that you can potentially avoid a lot of the behavioral mistakes of investing (namely, selling stocks that have become cheap and buying stocks that are expensive). It offers good returns, combined with a healthy “sleep at night” factor because you never have to make a “sell” decision based on the future direction of markets. The only thing you need to do consistently is buy excellent companies and add them to your collection. This is one of the easier strategies to stick to when it comes to your emotions.
The downside is that you risk holding on to deteriorating companies. In fact, a business that is widely recognized for its high quality has even further to fall when their business stumbles. And because you are always buying, it is hard not to buy even more of them as they decline. If they survive and return to prosperity, this strategy will work great. But if they do not, you risk losing more money than you would if you had cut your losers. Extreme concentration in any one position can be hazardous.
So, I think you need to set up rules for what kinds of stocks you are allowed to buy. Luckily, when it comes to selecting companies, we don’t need to reinvent the wheel here.
A key insight to be gained from Buffett is that cheapness alone shouldn’t be your sole criterion. You instead want companies that can grow wealth for many years, rather than offer a single, limited profit as they return to fair value. This is a big part of why he switched from “cigar-butt investing” to his current strategy (cigar butt investing, for reference, likens investing in dirt-cheap companies to picking used cigar butts up off the ground with the hope of getting another puff or two out of them). So you want companies facing a temporary setback, but that will eventually grow their earnings significantly over the long term.
This strategy overlaps pretty well with Warren Buffett’s stated philosophy of buying wonderful companies and holding them (preferably) forever. The characteristics of a wonderful business are hard to pin down in a single post, and there has been a lot of writing already on moats, float (Ie using other people’s money) competitive advantages, appropriate leverage, talented management, culture, cash flow predictability, working capital turnover, brand, cyclicality, environmental sustainability, corporate diversity, and any number of other traits. As a goal, though, you want companies that are positioned to thrive for the next 10-20 years, and you want to buy them when investor expectations for them are low.
Despite everything written about the efficient market hypothesis, it still seems like businesses come in and out of favor with investors. Industrial stocks trade very cheaply during and after a recession when they are bleeding cash, but can double or triple in price as economic conditions improve and they once again demonstrate their ability to earn a profit. Recently, Healthcare stocks were struggling due to increased competition, lower drug approval rates, and the threat of greater regulation of drug prices. These concerns now appear to have been over-estimated. Retail stocks today are priced for a string of failures. When an industry or sector is facing challenging circumstances, it can be difficult to see how conditions will improve. But usually they do (although the key word is “usually”). Value investing requires a leap of faith in this regard. The challenge is to grit your teeth, make your purchase, and leave it alone.
This is my first attempt at systematizing this approach to investing.
Rules:
- Once every two months, buy shares of one company from this list no matter what.
- You can never sell
- You can’t buy the same stock 2 months in a row
AMZN
MMM
GOOG
FB
AAPL
ADBE
BRK/B
AABA
TCEHY
SBUX
V
MA
MKL
PII
CMP
PYPL
CGNX
UL
LUV
DIS
ATVI
BF/B
BUD
HD
MTN
UNH
MELI
PEP
WMT
JPM
DE
UNP
TDG
HAS
I chose them because they have some combination of the following: a long history of strong performance, robust business models, recurring service-based revenue model, sustainable competitive advantages, and/or great management.
If none of these are appealing, put the money into one of many ETFs or Mutual Funds, like:
VTGMX or SCHF
VEMAX or SCHE
VFIAX or SCHX or SPY
GVAL
GMOM
MTUM
XLK
A final note: cheap is not the same as going up tomorrow. And stocks that have gone down recently are not necessarily cheap. Value and trend are different axes.
Disclaimer: these stocks are not recommendations to buy or sell. I have put them on my website for my own use.
Disclaimer 2: I am long: AAPL, BRK/B, AABA, TCEHY, PII, CMP, PYPL, SCHE, SCHF, GVAL, GMOM, XLK
Another alternative is to use Buffett’s 13-F filings and mirror his stock picks.