By Satish Prabhu
You would have heard about many investors who bought stocks and forgot for decades only to realise that their investments are now worth a few crores. Then there are stories of the next of kin receiving a huge inheritance from the deceased only because the latter never sold their stock over their lifetime. Buy and forget, i.e. staying invested for the long term and just doing nothing is the essence of “Coffee Can Investing”.
“Coffee Can Investing” was coined by investment manager Robert Kirby in 1984. He had a client whose husband bought shares of $5000 each on his recommendation but never sold those shares. After he died, they discovered that he had created huge wealth. His investments were worth more than $8,00,000 in one of the stock holdings. Kirby was quite impressed with his buy-and-forget strategy and named it “Coffee Can Investing” by taking inferences from the practice followed back in the days by people in West America. Before the banking system was developed, people there used to put their valuable possessions in a coffee can and kept it under the mattress for safe keeping where it stayed for years or even decades.
The premise of the Coffee Can approach to investing is to avoid the activity of moving in and moving out of the market. While the benefit of the power of compounding in long-term wealth creation is a well-known fact, the commitment to stay invested for a longer time frame without moving in and out under the influence of emotions like greed and fear is something not all investors can manage to do. In reality, most investors typically invest more when markets are high and less when markets are low under the influence of a herd mentality, instead of following the prudent approach of being greedy when others are fearful and vice-versa.
Warren Buffett says, ‘Investing is simple, but not easy.’ Why this is not easy is because investment decisions are influenced by human emotions in the form of thoughts, feelings and behaviour. Investing based on emotions like greed and fear is one of the reasons why investors earn sub-optimal returns as they try to time the markets. Someone asked Warren Buffet, “Your investing strategy is so simple, why doesn’t everyone just copy you”, to which he replied, “because nobody wants to get rich slow.”
To conclude, investors should follow the Coffee Can approach to investing by just staying invested for a longer time horizon and let the power of compounding do its magic.
(Author is Head – Content Development, Franklin Templeton India)