The Wealth Building Secret of the “Coffee Can” Strategy
“The money is made in investments by investing and by owning good companies for long periods of time. If [people] buy good companies, buy them over time, they’re going to do fine 10, 20, 30 years from now.” — Warren Buffett
Robert Kirby’s client called his New York office, her voice sounding distraught.
“My husband is dead,” she said.
I imagine, like many wealth managers in the mid-1950s, that Kirby had developed a personal relationship with this woman.
He probably consoled her and spoke to her. Listened to her problems and concerns. In all likelihood, he legitimately cared about this client.
Wealth management, back in the day, used to be a deeply personal business.
The client wanted Kirby to handle the stocks she had inherited from her deceased husband.
“I need help,” she said.
Now, Kirby had been working with this woman for a decade.
He managed her investment portfolio like most professional investment managers in the financial industry, then and now: He jumped in and out of stocks based on news, earnings announcements, and more. He periodically sold for profits, cut losers, and rebalanced her portfolio.
Kirby had done a good job. Good enough that his client wanted Kirby to take over her deceased husband’s stock portfolio.
So he agreed. “Send over his stocks and we’ll take care of the rest.”
But the rest, as they say, is history.
When Kirby looked at her husband’s stock portfolio, he discovered an incredible investing secret.
In fact, the secret strategy he discovered completely changed his perspective on investing and building wealth with stocks.
How powerful is this strategy?
The brokerage Fidelity discovered that this single strategy was responsible for the best returns across ALL their retail investor clients.
In 1984, Kirby wrote about this discovery in The Journal of Portfolio Management:
“When we received the list of assets, I was amused to find that [the husband] had secretly been piggybacking our recommendations for his wife‘s portfolio. Then, when I looked at the total value 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 and forget it.”
After 10 years of only buying, never selling, the now-deceased husband’s portfolio had massively eclipsed Kirby’s carefully managed active stock portfolio!
Kirby had been outperformed, it seems, by forgetfulness.
The dead husband’s portfolio had a number of stocks worth $2,000 or so. Since he had put in $5,000 into each buy recommendation, that means that a large portion of this man’s stocks had declined by -60%.
But he also had a few stocks that had grown to $100,000 each. Multiple 1,900% returns. And the portfolio had one stock that had grown from $5,000 to $800,000.
That one stock alone had grown bigger than the total value of the wife’s portfolio — the portfolio Kirby had been managing for 10 years!
This discovery led Kirby to completely rethink his approach to portfolio management and develop a powerful investing strategy called “The Coffee Can Portfolio.”
As Kirby writes, “The Coffee Can portfolio concept harkens back to the Old American West, when people put their valuable possessions in a coffee can and kept it under the mattress.”
This might surprise you, but the “Coffee Can” strategy is one of the several secrets that make the wealthy elite so wealthy…
It’s the strategy that’s been responsible for much of my mentor Mark Ford’s wealth across a variety of assets…
And it’s the strategy that forms the backbone of one of my flagship investment portfolios, which I call the Heritage Portfolio: Invest in assets you ideally never have to sell.
So now, I’m going to show you why and how the “Coffee Can” strategy works.
But first, allow me to introduce you to a related, and relatively controversial notion…
Are Monkeys and Dead People the Best Investors?
It’s widely known that most investors are terrible at investing.
Between 2001 and 2020, through four crashes and three recessions (we might be entering the fourth), the overall market — the S&P 500 — returned about 7.5% per year.
How did the average investor do?
According to the DALBAR report, just 2.9% per year.
That’s not great. It’s barely better than the average rate of inflation. And certainly worse than buying “risk-free” bonds.
Why is the average investor so wretched at investing?
According to an analyst from Index Fund Advisors:
“Often succumbing to short-term strategies such as market timing or performance chasing, many investors show a lack of knowledge and/or ability to exercise the necessary discipline to capture the benefits markets can provide over longer time horizons. In short, they too frequently wind up reacting to market maturations and lowering their longer-term returns.”
Simply put, the research shows that investors weren’t patient enough.
Investors routinely get scared due to short-term market crashes and volatility. They become emotional and sell too early.
To make matters worse, human investors typically don’t just underperform the overall market… They underperform monkeys, too!
In 1973, Princeton professor Burton Malkiel claimed in his book, A Random Walk Down Wall Street, that “A blindfolded monkey throwing darts at a newspaper's financial pages could select a portfolio that would do just as well as one carefully selected by experts.”
According to a 2012 Forbes article, Research Affiliates discovered that Malkiel was wrong.
The monkeys beat both regular investors and experts at picking winning stocks!
Analysts randomly selected 100 portfolios containing 30 stocks from a 1,000-stock universe. The process was meant to simulate 100 monkeys throwing darts at stocks.
They did this for every year from 1964 to 2010, and tracked the results.
On average, 98 of the 100 “monkey portfolios” beat the market. By a significant margin.
How?
The researchers pointed to the fact that many of the random stock portfolios contained smaller companies and more value stocks than growth stocks (much like the “junior” companies I pick in my flagship newsletter), as both traits have historically proven to produce better-than-average returns.
But here’s one thing they didn’t bring up: All of these “monkey portfolios” were actually “Coffee Can” portfolios in disguise.
The portfolios put an equal amount of money into each new stock, much like the deceased husband in Robert Kirby’s story...
And then they never sold.
And here’s one more datapoint that drives home the simple power of the “Coffee Can” portfolio strategy…
Just as DALBAR looks for reasons why regular investors underperform the market, the brokerage Fidelity wanted to understand which investors were beating the market and performing the best.
Simply put, they wanted to know what separated great retail investors from the poor performers.
What they discovered was shocking.
After looking at the performance of its customers from 2003 to 2013, Fidelity found that the customers with the best stock returns were either dead or inactive.
That is, these investors had 1) died, 2) had their assets frozen, or 3) simply forgot they owned stocks!
Now, I do not recommend becoming “dead” to improve your investment returns.
Rather, I recommend doing the one thing common to all three of these separate datapoints that led to fantastic returns:
Buy good or interesting-looking stocks. Hold them. Never sell.
I know this notion runs contrary to every emotion coursing through the veins of investors right now. Investors who are scrambling madly and selling their stocks, hoping to skirt disaster by holding onto what little remains of their stock holdings.
In my next post on Monday, I’m going to show you why selling is the last thing you should be doing right now. And why you should be buying instead. (I’ll even tell you what you should be buying.)
Don’t miss Part 2 of this article right here!
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