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How to Create Wealth with Low-Risk | Coffee Can Investing

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When we face basic questions like calculating the area of a cube or a cylinder, or even a complex shape, how do we go about solving them? We rely on formulas to find the answers.

But when it comes to investing, it’s a different story. The markets never fail in proving us wrong, and there are no fixed formulas to guide us.

Just imagine if we could have formulas that assist us in choosing the right stocks to invest in, helping us build wealth over the long term.

Imagine a scenario where you’re steadily growing your wealth without the need for constant monitoring or complicated analyses.

Think of an investment strategy that succeeds on patience rather than restless activity. It’s like letting your money compound over time, gradually growing your investments without the need for constant intervention.

In this blog and subsequent blogs, we will try to find the formulas that help us in identifying stocks and why these formulas actually work in the markets.

What is Coffee Can Investing?

In simple words, investing in 10 to 25 high-quality stocks and leave this investment portfolio untouched for 10 years or more.

The author of Coffee Can Investing book, shown many evidences that this simple strategy outperformed border markets with high margins both in bull markets and bear markets.

This investment strategy also called as “buy and hold” or “buy and forget”.

How do Coffee Can Investing define high-quality stocks?

The companies that grow their sales by 10% each year over the last decade and along with Return on Capital Employed (ROCE) > 15%.

this magic formula for growing your wealth by investing.

If you apply this filter in the screener website(Stock Screener India – Screener), you may get few penny stocks. And as we all know; penny stocks may not be good for long term portfolio especially when you are looking for capital protection and wealth creation.

We will talk about the associated risk with penny stocks in future blogs but for now to avoid this issue we can filter the stocks based on market capitalization > 1000 Crs ( In book author recommended >100Crs). You can pick market capitalization as per your risk apatite where you are comfortable investing your money in.

Let us apply the magic formula on screener and filter our stocks.

Applying Coffee can formula on Screener
Applying Coffee can formula on Screener
Coffee can portfolio as on 1st April 2024
Coffee can portfolio as on 1st April 2024

With this search query we got results of around 229 as on 30-03-2024.

In India, there are more than 5000 stocks listed, it is almost impossible to analysis and pick stocks from this universe of 5000 stocks. And now filtering this universe of stocks with our magic formula we can easily find our next investment opportunity.

Note: These filters don’t show NBFC’s (Non Banking Finance Companies)  and Banks as their ROCE would be single digit. For Banks and NBFCs ROE would be a better measure than ROCE. We can discuss this in future days.

You can individually study those stocks and invest or maybe you can focus on 5 to 10 different industries you are positive on and find the stocks that operate in those industries from our list of 229 stocks list.

For Example, For If you are positive on IT industry you may pick TCS, Sonata stocks and if you are positive on AMC industry(Asset management Companies) you can pick CAMS or HDFC AMC.

We will discuss on building portfolio based on these results in next blogs. But for now you may be having following questions in your mind.

Why Should I pick sales growth and ROCE as the metric for selecting high-quality stocks?

What happens if I invest at high valuations or at peak of bull run?

Even in the long-term investing, can I exit those stock investments at expensive valuations and re-enter the stocks when they correct?

The author, in his book “Coffee Can Investing,” delved into these questions extensively. I highly recommend reading the book to gain further insight.

I would like to deliver answer to you for the above questions shortly in next blog but for now I would like to complete the discussion on this post by the question “Why the coffee can investing really work?

What makes the coffee can investing work?

There are 2 aspects to answer this question. First, the formula itself and we will discuss about this in our next blog. Secondly the time period we hold the portfolio.

Two famous quotes from Warren Buffet are:

“Our favourite holding period is forever”

“The stock market is a device for transferring money from the impatient to the patient.”

By the quotes from Warren Buffet, we understand that the secret for wealth creation actually lies in the longer holding period. And With coffee can investing the Minimum holding period coffee can portfolio is decade.

Probability of gains in Equity investing over time
Probability of gains in Equity investing over time

As per the given chart above, the probability of gains increase with holding period. And the probability of gains would become near 100% index level.

As per the magic formula selecting the high-quality stocks + holding for a decade or more makes the coffee can investing is success formula for wealth creation.

We will try to discuss the above raised questions in the next blog and learn from the performance of Coffee can portfolio created in Aug 2017.

To stay invested for long term, It’s really important to create an emergency fund for your short-term needs. To learn more, check out ‘Where to Invest Your Emergency Fund?

All the information shared is for educational purposes only. The blog Finance Made Easy( and the author is not responsible for your financial decisions.

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