Unveiling the Coffee Can Experiment
15 stocks to compound your hard-earned money
It's a question we receive often: If you were to invest a lump sum in stocks for the long run right now, what would they be? This hypothetical scenario differs significantly from our usual strategy of incrementally adding capital to our portfolio during periods of broad market fear or through periodic purchases.
To address this intriguing question, we've launched a new experiment - not a real-money portfolio - we call the "Coffee Can" portfolio. This portfolio consists of 15 stocks, each with an equal-weight starting allocation. The core tenets of this approach are no rebalancing or trimming, allowing winners to run and the power of compounding to take full effect. The only exception to this rule is one potential selling decision per year, based solely on fundamentally disappointing performance.
The "Coffee Can" philosophy is rooted in the understanding that true long-term returns on incremental invested capital (ROIIC) and reinvestment rates take time to compound.
As we'll share in our upcoming Diploma deep dive, the substantial benefits derived from its highly successful acquisitions, such as Peerless and Windy City Wire, often materialize after a decade or more. By year 10, these acquisitions should have delivered an un-levered cash IRR of 16%. Over a 15-year horizon, that number’s ticked up to >20%. Over a 6-year horizon, we’re talking about a 4-5% IRR. Longevity is key to any serial acquirer’s and business’ success. High ROICs are meaningless if the business ceases to exist within 8-10 years.
In today's rapidly evolving business landscape, where disruption is more prevalent than ever and many retail investors are drawn to highly volatile stocks, we believe there's a great deal to learn from this "Coffee Can" experiment. It offers a counter-narrative, emphasizing patience and the long-term compounding of quality businesses.
Besides introducing the "Coffee Can" portfolio, we've also addressed the relative recent relative underperformance of defensive quality growth stocks relative to high-beta stocks. We believe this is largely irrelevant to our long-term strategy, as our focus remains on identifying businesses with sustainable competitive advantages and strong fundamentals. In today's bi-weekly discussion, we emphasized how crucial and challenging it is to identify the ROIC inflection point in these high-growth and more volatile businesses.
Let’s take a closer look at the 15 names we’ve singled out. Broadly, they can be divided into these six themes:
Serial acquirers
Defensive retailers
Long-lasting brand equity
Industrial leaders
Consumer companies with a growing worldwide presence
Network effects
As per usual, the transcript and slide deck can be downloaded below.