Mental Models discussed in this podcast:
- Deferred Tax Liability
- Skin-in-the-game
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Show Outline
Coffee Can Portfolio
- Seeking “Never Sell” stocks – only certain companies qualify
- Benefits from a deferred tax liability (Can become quite significant over time)
- Preferable for individual investors. Hard to implement professionally
Characteristics of a Coffee Can Stock
- An industry that lacks disruption risk
- Banking (Example)
- Stable and high returns on capital/equity (15% or higher)
- Long-term sustainable organic growth of at least 5% but preferably 10-15%. (You don’t necessarily want 20%+ growers that will eventually lose all growth)
- Low competition, could be regulated monopoly or oligopoly
- Founder led company or a long-term CEO with skin-in-the-game
- Zero or low debt/leverage policies
- The ability to be a ten-bagger or a 100-bagger
- Usually small with the ability to grow large.
- A small competitor with a competitive advantage (cost perhaps) over larger competitors in a big market.
- Think early Walmart, Costco, Home Depot, GEICO
- Intelligent capital allocation strategies that benefit shareholders
- Lack of dilution
- Growing dividends or buybacks over time (Dividend Champion type stocks)
- Unless it is a roll-up strategy, an average to acquisitions can be helpful, because they often destroy shareholder value.
You can’t think of your stocks as a “Portfolio”
- You are a true business owner
- Judge your success by the performance of individual companies, not the overall portfolio return.
- Logical point: If every individual company compounds at 10% per year or more, then the portfolio as a whole by definition must also compound by at least 10% per year.
- Position sizing no longer matters. Your greatest winners may eventually become 50%, 75%, or 90% of your total portfolio. That’s okay. That’s how the strategy works. This is how the strategy outperforms.
How to implement a Coffee Can Portfolio (The Process)
- Buy one new stock a year, each year you work.
- Put all of your savings for the year into that company.
- Never sell.
- Ideally register for the shares in direct certificate form. It can be electronically held at a transfer agent, but after the year, don’t hold the shares directly with a stockbroker.
- This limits your ability to sell the shares and is a huge psychological boost in implementing the strategy.
Summary:
In this episode, I discuss the coffee can portfolio approach to investing. This investing strategy involves never selling a stock once it is bought. Therefore, you must seek high-quality companies with long runways for growth and high returns on capital.
