Coffee Can Investing
Three Common Characteristics
The Coffee Can Portfolio tends to have three common characteristics:
- Special focus on the core franchises, instead of being distracted by the short-term gambles outside the core segment.
- Relentless deepening of competitive moats.
- Sensible capital allocation.
Trying to time the market patience using valuations as a guide can prove to be counterproductive.
Companies which possess these three characteristics mentioned above are not only very rare in India, they continue to outperform 99.5% of the listed companies year after year based on fundamentals.
Coffee Can Portfolio is skewed towards specific themes by design due to the desire for longevity and consistency of performance.
1.More Business To Customer business than Business To Business sectors: Eg. Banking, Pharma, etc.
Coffee Can Portfolio has small ticket size and repeat purchase of products and services like residential real estatebased on consumer loyalty and frequent consumer interaction due to proximity. Hence, consumers can recognise the trends better.
2.Structural and Cyclical Plays:
The author here wants to say that we as common investors shouldn't invest in cyclical stocks because economic cycles are unpredictable.
Moreover, a long-term investor who wants to successfully invest in structural stocks should follow the bottom-up analysis, i.e., first analyse a stock, then its sector and after that the economy.
3.Avoid companies that borrow lots of money to grow:
Leverage is good if it can improve capital efficiency or if it is for an increase in capital expenditure. Companies like Power, Steel, Real Estate offices, etc, need leverage to grow their revenue. This makes it difficult to sell their assets at a time of necessity. Changes in credit supply can affect their ROCE.
A large part of the bandwidth goes in servicing the debt in their balance sheet
4.Prefer companies with intangible strategic assets such as intangible assets:
This can include intellectual property patents or property know-how licences or culture-oriented aspects like hiring technological backbone and proactively looking after company's channel partners, vendors and employees.