The Coffee Can Portfolio—A Triumph of Lethargy and Sloth

In 2014, Michael Lewis’ best seller Flash Boys, began with the story of a company by the name of Spread Networks. Spread Networks was behind the construction of an 800 mile fiber optic network that stretched from Chicago all the way to New Jersey. This network would help speed the flow of data from Chicago (where the Chicago Mercantile Exchange is located) to Carteret NJ where the data centers for NASDAQ and other exchanges were located. The goal: To reduce the signal transport time by a mere 4 milliseconds thereby allowing Spread Networks and high frequency trading customers leasing their fiber cable to more efficiently arbitrage stock index futures and the underlying basket of stocks between the two locations. The book created quite a stir in the financial markets. The whole idea of spending $300 million to shave 4 milliseconds off signal transmission met with a certain bewilderment (however to someone practicing index arbitrage between Chicago and New York, the 4 millisecond advantage was a virtual eternity). Regulators, the investing public and government officials wondered if all this in and out trading was casting a negative pall on America’s revered financial markets. Many, myself included, would argue that they have in fact, help create exceptionally liquid and deep markets.

The Coffee Can philosophy, on the other hand, represents the exact opposite of high frequency trading because it entails doing nothing. Doing nothing also meets with considerable skepticism because as a species, humans hate to sit around doing nothing for very long. It’s akin to watching paint dry or grass grow or fishing. It’s much more alluring to try and make a killing in the day to day noise of the markets. What could be more fun than getting on board a biotech favorite like Regeneron Pharmaceuticals as it takes off like a rocket? With all the information we are bombarded with, all the electronic trading platforms available, CNN, CNBC, iPhone apps, etc., the most diehard trading junkie is in the transactional equivalent of heaven.

In its purest form, the Coffee Can philosophy is the ultimate buy and hold philosophy. Now, I know what you’re thinking, buy and hold has been proclaimed dead for years. After the 1987 crash, two 50% declines in the market between 2001 and 2008-09, the bursting of the tech bubble and the real estate slaughter during the financial crisis, why would anyone take leave of their senses and invest for the “long haul”. BECAUSE IT WORKS.

Robert Kirby, then a portfolio manager at Capital Group first wrote about the coffee can idea in fall 1984 in The Journal of Portfolio Management. “The coffee can portfolio concept harkens back to the Old West, when people put their valuable possessions in a coffee can and kept it under the mattress,” Kirby wrote. “The success of the program depended entirely on the wisdom and foresight used to select the objects to be placed in the coffee can to begin with.” The strategy is elegant in its simplicity: You find high quality, financially strong stocks and let them sit not for months or years—but for a decade or longer. Wall Street is constantly hung up on largely useless trivia such as quarterly earnings, revenue guidance and 1-3 year projections.

The advantages with this strategy: No bid/offer spreads to chew up your capital, no transaction fees/commissions to suck away your hard earned net worth. And the best part, you don’t have to regularly share your gains with that one entity that always gets its take—the IRS. It’s ridiculously easy to manage and frees up extraordinary amounts of time for other worthy pursuits. The biggest benefit according to Chris Mayer, though, is a bit more subtle and meaningful. “It works because it keeps your worst instincts from hurting you.”

Kirby told the story about how his idea came about:

“The coffee can idea first occurred to me in the 1950s,” Kirby writes. Then he worked for a big firm that counseled individuals on their investments. He had a client he worked with for 10 years whose husband died suddenly. She inherited his stock portfolio, which she moved to Kirby’s care. Looking at the portfolio, Kirby writes:

I was amused to find that the husband had been secretly piggybacking our recommendations for his wife’s portfolio. Then I looked at the size of the estate. I was also shocked. The husband had applied a small twist of his own to our advice: He paid no attention whatsoever to the sale recommendations. He simply put about $5,000 in every purchase recommendation. Then he would toss the certificate in his safe-deposit box (the 1980s version of a coffee can) and forget it.

In doing this, a wonderful thing happened. Yes, it meant his portfolio had a number of broken stories worth $2,000 or so. Small positions. But he also had a few large holdings worth $100,000 each. The kicker, though, was this: He had one jumbo position of $800,000 that alone was bigger than the total value of his wife’s portfolio. As Kirby writes, “[It] came from a small commitment in a company called Haloid; this later turned out to be a zillion shares of Xerox.”

To reiterate, the greatest advantage of the Coffee Can philosophy is that it protects us from ourselves. With all the available technology, we have quotes at our finger tips and vast storehouses of information available on our mobile phones. Will the fed raise rates? If so, when? Today? Tomorrow? Next quarter? Will Apple’s earnings beat its street estimates? Will it beat its “whisper number?” Will Greece default? Will the economy falter? Your mantra should become: WHO CARES. If you simply held Apple or any number of quality equities for years you would have made a fortune. I once did a study on each of the stocks I sold over the years for my own portfolio. One by one I noticed that my holdings continued advancing without me—leaving thousands of dollars on the table.

As Chris Mayer also stated, “You don’t put anything in your coffee can that you don’t think is a good 10-year bet: Poor Kirby had been diligently managing the wife’s account — keeping up with earnings reports, trimming stocks and adding new positions. All the while, he would have been better off if he followed the idler’s creed and just held onto his ideas.”

So now the big question remains, besides Kirby’s husband/wife combo, is there additional evidence that this method of investing leads to superior results? The answer is a resounding yes.

In 1935, as the worst of the depression was filtering through the American economy, a couple of investors decided to start a trust (a distant cousin to a mutual fund structure). The goal of this trust was to pick 30 blue chip dividend paying stocks that would withstand the test of time—bear markets, wars, disease, scandals, political and economic upheaval. With some blue chip corporations weathering the depression, the trust did have several solid companies to choose from. Moreover, given how stockbrokers and bankers fared during these years, the trusts founders wanted no portfolio manager risk or trading risk. These 30 picks would remain in the portfolio forever—never to be sold. Only in the event of a suspended dividend or bankruptcy would a holding be eliminated. Further, no companies would be added either except through spin offs, mergers or reorganization. This was the ultimate passive portfolio. Zero turnover. Bet you’re wondering how the trust fared. Well the name of the trust was the Corporate Leaders Trust. [Quite ironically, the fund changed owners several times in its lengthy history and thus its named changed more frequently than the portfolio! The current name is the Voya Corporate Leaders Trust.) The trust has enjoyed an unparalled record of nearly 80 years and its performance easily eclipsed the Dow Jones Industrial Average and the S&P 500. Take a look at the figure below.

Even more incredible is that this portfolio contained no technology, no healthcare and no financial stocks (remember bankers and brokers were taboo around the time of the depression). Still think buy and hold is dead?

And in an even more intriguing twist of fate, just five years before the trust was conceived, the ultimate practitioner of the coffee can style of investing was born. His name: Warren Edward Buffett. Buffett is widely regarded as the greatest investor of the 20th century and in some circles, one of the great business magnates of our era. His capital allocation skills are second to none. That he is the second richest man in the United States with a net worth of $67 billion boggles the mind as most of his wealth is the result of investing in the stock market (the typical billionaire in America got that way from real estate, oil, inheritance or via being a founder or substantial owner in a business that thrived such as Bill Gates of Microsoft or Sam Walton of Walmart.)

Buffett’s investment canvass is Berkshire Hathaway. This holding company houses dozens of great names such as Nebraska Furniture Mart, See’s Candies, General Reinsurance, and Geico to name a few. But at the heart of the Berkshire Empire is Buffett’s vast portfolio of stocks. He owns 10 percent of Coca Cola. He owns large interests in Wells Fargo, Sanofi, Phillips Petroleum and others (for a full list of Berkshire’s stock holdings go to his annual report online at www.berkshirehathaway.com
A $10,000 investment in the Voya Corporate Leaders Trust in 1970 became $1.2 million by 2015—an 11.3% compounded return. As a comparison, the S&P 500 compounded your money at just over 10% over the same time frame. That same investment in Berkshire would have become $48 million—a compounded annual return of over 20%. Compounding money at 20 percent for a decade will make you wealthy; although very few can lay claim to those kind of performance numbers. Post 20% per annum returns for 4 decades, and you’ll find yourself atop the Forbes 400 list.

When I first saw his holdings my first conclusion was that these stocks are in plenty of portfolios—there is nothing truly unique here. Lots of folks own Coke and Wells Fargo. What then, is different about Buffett? That he takes large positions is one thing but many fund managers do that as well. How in the world did he amass $67 billion buying stocks that appear in so many portfolios? The answer lies in Buffett’s creed. And to appreciate the secret sauce, one merely has to read some interviews and books that have been published over the years about Warren Buffett (see our reading list for more on the greatest investor of all time). I have captured some of the more memorable Warren-isms below.

Regarding his time frame for holding stocks: “Our favorite holding period is forever.”

“Lethargy bordering on sloth remains the cornerstone of our investment style.”

“We want to own a share in a business, one that if the stock exchange were to close down for ten years, we’d be perfectly comfortable holding onto.”

“For investors as a whole, returns decrease as motion increases.”

See any common themes here? Buffett has held many of his stock picks for decades. American Express, Geico, Coke, Washington Post were all held for at least a decade, some for much longer. There is nothing wrong with trading or speculating for the short term, but when you look at some of the truly wealthy people of this world, the vast majority of them focus on the long view. As shareholders of the Voya Corporate Leaders Trust and Berkshire Hathaway (as well as Kirby’s clients) can attest: LESS IS MORE.

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