We all know the significance of books. And still most of us are not able to read books as often as we’d like to. There could be various reasons for that like

Which book to read
Lack of time and energy
Short attention span (due to social media distraction)
Boring content

This article or blog will help you with the right summary of good investing books. Coffee Can Investing is the first book chosen in this series

(link to 2nd book in this summary series is here

I will recommend you to buy and read this book

Lets Start

It is critical to nail down objectives and build your financial plan around them
Equity remains the most powerful driver of long term sustainable returns
Do not get trapped in Real estate investments and gold and fixed deposits

Choose Stocks based on below Filter

Mcap > 100 cr
ROCE > 15% & every year in last 10 years
Revenue Growth >10% every year in last 10 years
If its a bank, then choose ROE>15% and loan growth >15%

Hold Stocks identified through filter for 10+ years

Also read : SWOT analysis

Why ROE and ROCE are important parameters

Over the long term, it’s hard for a stock to earn a much better return than the business ,which underlies it, earns.
Charlie Munger

Why 10 years holding is important

Multiple back testing on above filter shows that there is higher probability of profits over 10+ year holding periods
Power of compounding comes into picture
Neutralizing negatives of noise over longer periods. There could be blips in stocks prices which emotionally drives us to make exit.
By keeping the portfolio untouched, one will keep the transaction costs minimal

Low risk high return — Source : Ambit Capital

Shareholders return over 10 year holding period — Source : Ambit Capital

Earning growth of a company is dependent on two factors

Growth in capital employed and Return on Capital Employed

Look for companies where ROCE is decent or high and less capital requirement like

Low Capital requirement and high ROCE e.g. HUL
High Capital Requirement and decent ROCE e.g. HDFC

Avoid companies where

High Capital Requirement and low ROCE e.g. Telecom sector in last 10 years

Share price of company= Earning Growth * P/E multiple

Look for companies where earnings growth contributes to increase in share price and not simply re-rating of P/E multiple

Coffee Can portfolio is skewed towards

B2C businesses ( vs B2B)
Structural Businesses (vs cyclicals)
Avoiding companies that borrow a lot to grow
Companies with lot of intangible assets

Expenses matter everywhere be it brokerage costs or transactions costs or MF entry, exit loads or yearly expense ratios

It always pays in longer run to pay for advisory

Real estate is a dangerous asset class for investors

Huge investment size needed
Its an illiquid asset class. You may not be able to see at the right price when needed
High transaction costs like stamp duty, registration charges bump up the prices
Its a non standard asset. Prices vary in different cities, different regions for same land area. Returns are mostly by luck
Its one of the least clean sectors, although after RERA law and Demonetization, things are better

Small Cap Stocks are beautiful

They can outperform broader large cap universe
They can grow much faster when credit availability is plentiful and economy is accelerating
They have less sell side analysts as number of companies are large and are yet to be discovered
Big players stay away due to sizing or liquidity issues while selling
Drop in capital costs helps small caps disproportinately as generally they have higher lending rates

How can Investor do not regret equity investment?

For an investor to stop regretting investment in equity markets, his probability of earning profits should be twice the probaility of generating losses

and that period of holding is minimum 1 year

Further, As the investor’s holding period increase from one year to 10 year, his portfolio or positions moves from high risk, low return to low risk, high return position

Even for a short term, investors have to rely on quality companies as many thesis shows that lower the investment horizon, lesser should be the volatility in your portfolio to meet the desired outcome and that’s possible with quality companies only. Longer the holding period, lesser is the volatility of high quality portfolio

Investors who are able to combine patience with high quality portfolio constructions should be able to pull off outstanding return with low levels of volatility

For a portfolio, invest in Large cap, mid cap and small cap stocks

Large cap stocks should be invested through ETF

Mid cap stocks can be chosen as Coffee Can portfolio approach

Small Cap stocks should be chosen from Clean and Good framework

Clean Framework can be determined from quality of accounts published and corporate governance records

Good Framework comes from judicious use of Capex and return of surplus capital. It can be seen as how much capital invested and turned into sales into profit turned into balance sheet strength turned into free cash flow and invest again that cash flow leading to a cycle.

While a Coffee can portfolio generates a stronger return relative to Sensex returns, please make a note that not every stock has generated stellar returns

Essentially what this book highlighted is :

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Investing for long periods of time in high quality portfolio….

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….with a higher weightage to high quality small cap companies….

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….while ensuring that you don’t pay much by way of fees….

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….and avoiding investment traps like real estate and gold….

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….should lead to significant and sustainable wealth creation.

Also READ : LITTLE BOOK THAT BUILDS WEALTH SUMMARY

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