Read & Grow
Discussion on the theme of the book ‘Coffee Can Investing: The Low-Risk Road to Stupendous Wealth’ held on 20 June 2024, under the ‘Read & Grow’ series. The panellists were Babu Krishnamoorthy,Chief Sherpa, Finsherpa Investments Pvt Ltd; Ajit Gautam,Partner, Chartered Accountancy firm and Director, Accounting Services Company; and Satyanarayan Yanmantram, Partner, Sri Krishna Capital.
Babu Krishnamoorthy: The year 2016 was an epoch-making year in various ways. It was the year when demonetisation was announced. While we may argue whether it worked or not, one significant outcome was the shift from physical currency to electronic currency. This transition facilitated the adoption of digital methods for managing finances, including the use of UPI and other mobile apps.
Unexpectedly, this shift also sparked a surge of interest in the stock market. With just a simple mobile phone, people from any corner of the country could now easily invest in even a single stock. This newfound accessibility led to a wave of new investors entering the market. Currently, there are millions of new investors entering and participating in the stock market.
The democratisation of the capital market among the general public is a positive development for the country. However, amidst this surge of activities in the stock market, many investors lack a structured investment approach. “Coffee can investing” offers a valuable framework for entering into stock investments. Top of Form
The book ‘Coffee Can Investing’ is authored by practitioners of the craft: Saurabh Mukherjea, Rakshit Ranjan, and Pranab Uniyal. Saurabh Mukherjea is renowned for his successful fund management at Marcellus Investment Managers. Previously, he held positions at Ambit Capital and has a strong background in equity investing, with education in London. Pranab Uniyal and Rakshit Ranjan have worked with Saurab Mukherjea at Ambit Capital.
There are multiple philosophies of making money. You may have a trading philosophy, which means you buy and sell constantly with the idea of making money. Investing is another philosophy, in which you buy stocks, hold them for long term and make returns. Coffee can investing is not a trading strategy but an investment strategy.
Ajit Gautam: There are two fictional characters in the book: Talwar and Sanghvi. They are both aged 54 years. Both graduated in 1991. One is in employment and the other is in business. They made some wrong decisions in their investment portfolio. The theme of the book typically covers people who entered their earning years in the 90s, areas where they could have gone wrong and what they should have actually done better. The authors argue with data, illustrations and graphs as to why one should put money into financial instruments and move away from real estate.
When the book was written in 2017, 77% of household savings went into real estate. There have been many developments over the last seven years. They recommend allocating 20% of our investments in coffee can portfolios. They also suggest that the portfolio should include large cap stocks, exchange traded funds and small cap funds. What is important is that we must invest in clean and good companies, which are transparent and free of scams.
Within financial instruments, we should have diversification. The authors feel that the Indian residential and commercial market is overheated and it may take a few more years for it to correct and hence, people should become part of the world of financial instruments in a significantly better way.
The book relies on information available over 25 years, starting primarily from the post-liberalisation era of 1991. If you stay invested in good stocks for a long term, without worrying about what is happening in the market today, then you will get great returns over the long term. That’s the message from the book in a nutshell.
The term “coffee can” originated from the practice where investors used to put their money, gold and other valuables into a coffee can and forget about them for years, allowing the investments to grow steadily.
Satyanarayan Yanmantram:To me, the message the authors try to convey is loud and clear. Focus on quality stocks. Irrespective of market cycles, they will perform. The quality covers areas such as corporate governance. In the last four years, we have seen a bull cycle and we have to be a little bit cautious now as millions of new investors are entering the stock market. We must read and grow, like what they say in mutual funds, ‘Read all scheme related documents.’
Before getting into equity, you should know the promoters, the quality of the company, what they produce and what they are going to give us back. Everything is notional until you sell. My father might have bought a land for 10 lakh rupees and it may fetch me one crore after several years. When they go for a war, they wait for the right time. The same thing applies to stocks. You have to wait for a longer duration. Though the book was written in 2017, the formulae for financial ratios like PE, EPS and PEG remain unchanged. The numbers, though, will be different.
Babu Krishnamoorthy: To create a coffee can portfolio, the authors suggest five filters. Create a portfolio that has anywhere between 10 and 25 stocks only. You don’t have to keep 150 stocks. Do your homework. 10 to 25 is their magic size and it is easy to monitor on an ongoing basis. Within this, we must reasonably diversify.
Ajit Gautam: Let’s look at some of the filters that the authors prescribe for the coffee can portfolio. The first is a listed company with a market cap of not less than 100 crores. Two, the company should have been in existence for ten years and in those ten years, they should have grown in revenue, year after year, by not less than 10%, net of inflation. The third criteria is, they should have generated a return on capital employed of 15%. For companies in the financial services sector, it was a return on equity and not on capital employed, because financial services companies typically borrow.
Babu Krishnamoorthy: Can you elaborate on the criteria of evaluating the ‘brand and moat?’
Satyanarayan Yanmantram: Brand is built over a period of time. It is not built within two years or three years. Once a brand is built, that becomes unshakable, like the Tata brand for example. Brand is similar to fundamental analysis. It will help the investors to pick the right company. Within a brand, there could be many companies and sectors. For instance, within Tata brand, Tata Teleservices did not do well. Everything is subject to market risk. We must remember that no company will allow a decent brand to die.
Today, as per the SEBI’s categorisation, the top 100 companies form the large cap. The earlier criteria for a large cap was a market cap of more than 20,000 crores. Earlier, in the Sensex, 75% was in large cap. Today, it is only 63 or 64% and the rest is mid and small cap. Whether you are buying a large cap, a mid-cap or small cap, you must be cautious and see if the brand is already established. You may have 500,000 followers on Facebook but only a few may be your close friends. Coffee can investing is similar to this, where you focus on good quality rather than quantity.
Babu Krishnamoorthy: Year on year revenue growth of 10% is a tough criterion but a good one. It really speaks volumes about the management. But apart from financial numbers, the company must have a reasonably good brand. The brand must be recognizable in the field that we talk about. Third, it must have some competitive advantage or what we call as ‘moat’ in the financial services space.
Let me take the example of Sundaram Finance, just for illustration. Someone may have money to start a company similar to Sundaram Finance but to get to where Sundaram Finance is today, it will take them another 50, 60 or 100 years. It’s not just about the money. It’s about the trust and the network. They have about 700 or 800 offices. In every small city, town or village, they have a representative who knows how to finance trucks, who knows the truck owner and his family and who knows everything about financing. That information or knowledge is intangible and to replicate it is very difficult. That’s what the authors mean by ‘moat.’ Every business has a moat. It’s important to understand what that moat is. Look at the financials. It is really important, but also marry it with the non-financial aspects like the brand and moat.
The authors also advise us to consider the expenses and costs. In the mutual fund space, there is the DIY or direct form of investing. You can also invest through a regular distributor. While the direct option is cheaper, what criteria should people use to differentiate when they are going from direct to regular or from regular to direct channel?
Satyanarayan Yanmantram: For a registered investment advisor, you may pay some fees like how you pay to the doctors. If you’re buying the stock directly, there is just an one-time expense involved, which is a commission that you pay. It may be 0.25 or 0.5% or even zero in some cases. But we must always be cautious about zero commissions and combo offers.
If we avoid wastages, we can make wealth. In mutual funds, there are two platforms available. One, you can buy directly, which was introduced five years before, where the expense ratio could be 1% approximately. It may differ from scheme to scheme and category to category. Just like savings getting compounded, expenses also get compounded. So, we must definitely look at the expenses that we incur.
But generally, an ethical option can be costlier initially but cheaper in the long run. An ethical doctor may charge a high-fees but he will avoid an operation. In any profession, nothing comes free. I am a registered investment advisor and we are a population of less than 2000 people in a country whose population is 140 crores. India is not a mature market yet and we have a long way to go. If you use a DIY platform, you must be well-informed. The distributors, in my opinion, help you to manage your behaviour. If you manage your behavior, definitely you will make money more than buying and selling.
Ajit Gautam: Most investors are not aware of the extent to which expenses compound. That’s why, over a period of time, as it’s happening in the US, in India also, more funds have started moving into being passive funds. Exchange traded funds are an example. They are less distributor-driven and more advisor-driven, to take care of the power of expenses that tends to bring down the returns substantially over time. Therefore, as the market matures, in the mutual fund market, more money is pouring into passive funds.
The real estate was a very unregulated market. A lot of black money was in the system and that invariably went into real estate. The real estate saw a boom between 2003 and 2013. But the authors refer to that boom as overpricing. Probably, there is a little bit of bias, but all this bias is also backed up by data. The prices of residential and commercial real estate during the period between 2003 and 2013 went up so much that even though there has been a correction after that, it is still not up to the expected levels. The real estate market has not grown in the last 10 years. When there’s no appreciation, the yields will be low. Therefore, it doesn’t justify in the short term to stay invested in real estate or to make new investments into real estate.
Babu Krishnamoorthy: We can’t take the advice of the authors that equity is any day better than real estate as a gospel truth. That’s not true. But two points emerge. One, equity as an asset is an easier asset to hold. You can buy an equity share with just 500 rupees in your bank but you cannot buy a meaningful real estate unless you have a couple of lakhs. Equity is an easier asset to buy. Two, if you want to unwind an equity share today and if you sell before the market closes, tomorrow evening, there is money in your bank account. In real estate, if you set your mind to sell, it could be a couple of months before you realise a deal.
Warren Buffet says that investing is simple, but not easy. It’s a beautiful phrase that brings out the essence of equity market investing. The factor of patience and behavior of an investor is a big factor in creating wealth.
Satyanarayan Yanmantram: I will give you a small example. In Velachery in Chennai, when the floods came, how many people sold their property? When Tsunami came, how many people sold their assets in Besant Nagar? Hardly a few. But when it comes to the capital market, we lose the patience, because we see it regularly. Warren Buffett says, “Defer your taxes.” We pay the taxes when we sell. What Warren Buffet means is that you must have the patience and you have to wait. He also says that if the market is closed for the next ten years, then he will be happy. That is the mindset that we need. Buy quality stocks, hold it for a long term and enjoy the returns.
Many middle income people bought real estate and are spending their salary on EMI. They have very little money to diversify and invest in capital market. Also, short term and long term perspective may differ from person to person.
