The Best Stock Investing Strategy for a Recession (And Beyond)
What follows is an investing strategy so powerful, the brokerage Fidelity discovered that it was responsible for the best returns across ALL their retail investor clients.
During recessions, depressions, wars, pandemics, and more, this simple investing strategy out-performed all others.
This simple fact alone means this investment strategy should absolutely be a pillar of our own financial plans.
We call this method “The Coffee Can Portfolio,” because, as famous wealth manager Robert Kirby (who coined the name) put it: “It harkens back to the Old American West, when people put their valuable possessions in a coffee can and kept it under the mattress.
Now, this might surprise you, but the “Coffee Can” strategy is one of the several secrets that make the wealthy elite so wealthy…
Which is why it’s the strategy that forms the backbone of DIYwealth’s flagship investment portfolio, the Heritage Portfolio.
So now, I’m going to show you why and how the “Coffee Can” strategy works. Irrefutably.
But first, allow me to introduce you to a related, and relatively controversial notion…
In this video, we explore the pros and cons of buy-and-hold investing in dividend-paying companies.
I'll also explain the two macroeconomic catalysts that spurred me to invest in gold and silver—both in physical gold, like bullion coins and ingots, and some stocks.
Contents:
0:00: Coming up: Why Monkeys and Dead People are Better Investors Than You
0:45: Robert Kirby discovers something shocking locked in a safety deposit box...
2:40: The Origin of the Coffee Can Portfolio: One of the Best Long-term Retail Investment Strategies
3:56: Most investors are actually really bad at investing — here's some proof and a reason why
5:58: Why retail investors perform worse than monkeys
7:58: Why retail investors perform worse than dead people
8:57: The reasons why the Coffee Can strategy works so well for building real wealth
10:55: Why so few people actually invest this way
13:30: Why stocks tend (most of the time!) to be better for Coffee Can strategies than index funds or ETFs
15:30: Another reason this strategy works so well: Stock investing is like baseball played by laser-powered death robots
17:45: Risk in the market tends to go down the longer you own stuff
19:10: Some final thoughts and a question for you: Why are you investing to begin with?
20:50: Thanks for watching (& the blooper reel)
Trading vs. Investing: The Best Stock Investing Strategy is Also the Simplest
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 famous DALBAR report (which has measured the effects of investor decisions since 1994), the average investor returned just 2.9% per year. [1]
That’s not great. It’s barely better than the historical average rate of inflation. And certainly worse than buying “risk-free” bonds.
Why is the average investor so wretched at investing?
This message from Index Fund Advisors gives us a clue:
“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.” [2]
Simply put, the research shows that most investors just aren’t patient enough.
Meaning: 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.” [3]
According to a 2012 Forbes article, Research Affiliates discovered that Malkiel was wrong. [4]
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 is it possible that monkeys are better investors than humans?
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 featured in DIYwealth’s 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. [5]
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 nearly every emotion coursing through the veins of investors when times get scary. When everyone else is panicking and scrambling madly to sell their stocks, hoping to skirt disaster by holding onto what little remains of their stock holdings, how are you to just sit there, calmly?
Well, in hopes of convincing you, I’m going to show you why selling is the last thing you should do when the markets go haywire. And why you should buy instead. (I’ll even tell you what you should be buying.)
Why “Coffee Can” Investors Never Sell Their Stocks
The strategy is simple enough.
Buy good or interesting-looking stocks. Hold them. Never sell.
There are some intuitive benefits to investing this way.
The “Coffee Can” strategy involves no repeated transaction costs for buying and selling securities frequently.
There are no administrative or wealth management costs. Those fees (along with transaction fees) may seem small. But overtime, they can add up to a small fortune lost.
Stocks you own continue to compound uninterrupted, through good and bad market conditions.
Coffee Can investors may benefit from more favorable tax treatment than traders. For example, long-term capital gains tax rates may be lower than short-term capital gains tax rates.
But there’s another, more subtle benefit about “buy and hold” investing that I don’t think I’ve ever seen any other investment analyst write about…
Most people do not want to live glued to their computers, watching for subtle signs or alerts that it is time to buy or sell a stock.
Most people want to live their lives. Walk in parks. Drink coffee with friends. Travel, work, watch movies, cultivate hobbies, dance.
Speculating and trading is a trap, sucking hours away from more fulfilling experiences.
Investing is liberating. It can free you — both by getting you richer and by letting you live a life without having to constantly worry about your portfolios.
By investing with a “Coffee Can” strategy, you keep your worst instincts from hurting you.
You avoid the obsession with checking stock prices. You stop buying and selling over and over. And you never have to fret over the economy or any bad news.
This strategy forces you to extend your time horizon. And it prevents you from “putting anything in your coffee can” that you don’t think is a good 10- or 20-year bet.
Really, your success mostly depends on the types of assets you put in your “coffee can” and how much you pay for them.
We’ll move onto that momentarily. But very quickly… I want to address a question that might be piercing your consciousness at this stage…
The Biggest Drawback of “Coffee Can” Investing
The benefits of the “Coffee Can” portfolio are obvious. But the actual execution? It’s proven to be quite difficult for most retail and institutional investors.
On the institutional and investment advice side, the reasons are obvious: The “Coffee Can” portfolio goes against all the quantitative models that operate under the assumption that rebalancing a portfolio like an index fund is a necessity (it is not).
Also, many businesses do not want to offer a service that takes over 10 years to fulfill. As Coffee Can coiner Robert Kirby said in his original paper, “A decade is likely to exceed the career horizons of most corporate executives and pension fund administrators, to say nothing of most money managers.”
Plus, many brokers and investment managers charge per transaction. If an investment manager recommends a “Coffee Can” portfolio to everyone… they are essentially guaranteeing that they will not get paid again!
That’s institutional investors. But the reasons why regular people do not undertake this strategy are more psychological in nature.
Holding a stock for at least ten years is hard. Much can change. The ups and downs can be terrifying.
But more often, it’s not the drawdowns that scare people out of a stock. It’s the boredom.
Stocks that grow to enormous heights often go through long sideways and down periods. For example, Bank of NY Mellon (BK) was a long-term “100-bagger,” a stock that goes up over 10,000%. But from 1976 to 1981 and from 2000 to 2015? The stock went sideways.
Same is true for American Express (AXP): the stock was flat from 1985 to 1992. Even the great Berkshire-Hathaway (BRK.B) went nowhere between 1998 and 2005.
Holding a stock for 5 to 10 years that goes nowhere can be more terrifying than a crash. After all, people see other stocks moving higher while the one they own is moving nowhere.
Whether it’s a desire for control over their finances, or a feeling like they need to be doing something “active” to earn money, regular investors will often sell too soon.
And as we discussed earlier, this often leads to worse returns.
Now, this might seem counterintuitive, but stocks are usually (but not always) better suited for “Coffee Can” portfolios rather than index funds or ETFs.
Especially stocks with high cash flows, a history of rewarding shareholders, and steadily increasing dividends.
There are two main reasons stocks are generally better than index funds for a “Coffee Can” portfolio…
The first has to do with a hint I dropped earlier: outperforming portfolios typically had a lot of “value” stocks.
A value stock is any company that can be analyzed with traditional fundamental analysis and determined to be “cheap,” “fairly valued,” or “expensive.” A value investor will typically try to buy a stock they determine, using mathematical models, to be cheap or fairly valued.
This is opposed to “growth” stocks, which are companies that investors generally think will deliver better-than-average returns because of their future business potential.
Now, without going off on too long of a tangent, I do not actually believe in the distinction between “value” and “growth” stocks.
For the purposes of the “Coffee Can” portfolio, however, I mentioned that a big determinant of success is how much you pay for a stock. It is much easier to determine the value of a stock as opposed to an overall index of stocks. Therefore, it is much easier to pay a better price for a stock than an index fund.
The other reason stocks are better than funds for this investing approach has to do with something Kirby wrote in his original paper: “Each surge in the popularity of index funds seems to follow a period during which the S&P 500 has been an excellent performer. Most index funds are not set up to avoid inferior performance.”
Basically, because index funds are constantly weighted and rebalanced, trimmed and repositioned, they end up losing out on one of the main features that make the “Coffee Can” strategy work so well…
The “Coffee Can” Strategy Works Because Risk Goes Down the Longer You Own a Stock
Most people think about investing like baseball.
Each stock trade is like stepping up to the plate for an “at bat.” Each buy is a swing. Each loss is a strikeout. More conservative players try to aim for “base hits.” More aggressive players try to aim for “home runs.”
In baseball, for every “at bat,” there is a finite result.
But stocks are not really like that, if you’re an investor.
Jeff Bezos, the CEO of Amazon, one of the best-performing stocks of all time, put it this way in his 1997 annual shareholders’ letter:
“We all know that if you swing for the fences, you're going to strike out a lot, but you're also going to hit some home runs. The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score 1,000 runs. This long-tailed distribution of returns is why it's important to be bold. Big winners pay for so many experiments.”
What Bezos is saying, here, is that when you buy a stock, you have a huge huge number of different outcomes.
And the longer you hold a stock (or many stocks), the greater the number your possible outcomes can be.
That’s why, with one stock, it’s possible to hit a home-run so massive that you can retire forever.
Statistically, that is one of the many possible (if unlikely) outcomes.
To put this another way, stocks have a floor. They can only go so low ($0).
But stocks do not have a ceiling. They can theoretically go up to infinity.
And that is the main reason why a well diversified “Coffee Can” portfolio works so well. One big winner is more than enough to make up for lots of losers and laggards.
But there’s another reason why this diversity of potential outcomes gives investors a better chance when they never sell…
A diversified portfolio of stocks tends to become less risky the longer you hold it.
While the S&P 500 experienced annual losses in only 11 of the 47 years from 1975 to 2022, the spread of possible outcomes was extremely wide. [6]
There were enormous one-year wins. But also enormous one-year losses.
But there is one simple strategy that has never, ever lost money in the overall stock market.
Not once over a 95-year period.
That’s strategy? You guessed it. The “Coffee Can” approach.
The brokerage company Schwab tested to see what would happen if you bought stocks on any random day between 1926 and 2021 and then held on for varying lengths of time. [7]
As you can see in their findings, average annual total returns (returns with dividends reinvested) decreased the longer you held…
But more importantly, so did losses.
Whether looking at the best and worst case scenario, buying and holding became profitable after 20 years. Every time.
The goal in building wealth is to get richer every month and every year.
The best way to do that, historically, has been to buy, hold, and wait.
Mix that with compounding, which funnels stock income back into your assets…
Mix that with dollar-cost averaging, which allows you to lower your cost basis and increase the likelihood of profiting…
Mix that with the careful selection of stocks with qualities that have been proven to outperform…
And you have an extraordinarily powerful formula for building wealth.
A formula that simply involves a “Coffee Can,” and perhaps a little bit of patience or forgetfulness.
And to make this even easier for you, I’m going to give you three ways to get started RIGHT NOW.
Strategy No. 1: The DIYwealth $10 Daily Challenge
The purpose of this challenge is pretty simple:
To get at least $10 richer every day in the next year.
All you have to do is…
Invest $10. Every day.
That’s it.
…
Sorry, lost my salesman mojo there.
But seriously: That’s the challenge.
Put aside $10 to invest every day.
$10 is not a lot of money.
It’s a little more than the cost of a Big Mac meal. It’s two lattes.
If you’re well off enough to be able to think about your finances and investing in the first place, you can afford to do this.
If you do this and you automate it, you will end the year with about $3,500 you don’t have now.
So if you think you have what it takes to build wealth and complete this challenge…
Here’s what you do:
Set up a recurring daily purchase of a stock in a brokerage app or account of your choice. I recommend Robinhood if you’re just starting out.
If you don’t want to invest your money, just set up a recurring daily bank transfer to a savings account.
If your brokerage doesn’t support recurring investments, try to transfer $70 per week into your account. When you have enough to buy a share of a stock, buy it with the accumulated funds.
What do you buy?
Pick one (in order from lower to higher risk):
$SPHD (the Invesco S&P 500 High Dividend Low Volatility ETF, a high-dividend, low-volatility ETF)
$SCHD (the Schwab US Dividend Equity ETF, an ETF that seeks to track the total return of the Dow Jones U.S. Dividend 100 Index)
$TDIV (an ETF that tracks the First Trust NASDAQ Technology Dividend Index Fund, a dividend-weighted portfolio of up to 100 companies classified as a technology or telecommunications)
$QTEC (an ETF that tracks an equal-weighted index of the largest Nasdaq-listed US technology stocks)
$JEPI (the JPMorgan Equity Premium Income ETF, which seeks “to deliver monthly distributable income and equity market exposure with less volatility”)
The ticker symbols above are all Exchange-Traded Funds, or ETFs.
An ETF is a basket of securities that trade on an exchange, just like a stock.
ETFs can contain all types of investments including stocks, commodities, bonds, derivatives, and real estate. Some offer U.S. holdings, international holdings, or a blend.
ETFs offer low expense ratios and fewer broker commissions than buying stocks individually.
And because of the transparency and number of choices available to investors, regular people and beginner investors are able to intelligently choose where they want to move their money.
That’s why, for decades, the number of ETFs and the amount of money invested in them has ballooned.
In 2005, there were 453 ETFs available on the market and $417 billion invested in them. In 2019, there were 6,736 ETFs and $5.6 trillion invested. [8]
Why ETFs?
Well, there are a lot of advantages to certain ETFs, and I want to share the biggest one. But the biggest advantage of certain ETFs…
Is that they allow you to buy once… hold forever… and take advantage of long-term compounding.
The cool thing about ETFs is that you can invest a little bit at a time, which will average out your costs. (Any market downturn is now turned into an opportunity for you.)
Or pick a fund of your choice, as long as it pays a safe dividend.
It doesn’t matter. As Mary Oliver wrote: Let the soft animal of your body love what it loves.
Let’s see if your soft animal loves strategy No. 2.
Strategy No. 2: Get Rich with Double Compounding
If you took a penny and doubled it every day for a month, how much would you come up with? A hundred dollars? A thousand dollars? How about a million dollars?
Not even close.
If you start with just a single penny and double it every day for 31 days, you’ll end up with… $21,474,836.48. Over twenty-one million dollars in a single month!
This is an example of the power of compound interest.
Your original penny will have turned into two. But then those two will have turned into four, those four turned into eight, and so on.
The growth of your money will have accelerated, or sped up, not only because your original penny was collecting interest but also because all the pennies you received as interest also began to earn interest. And so the growth built up — or compounded.
That’s how we get the term compound interest, one of the most powerful forces in the universe of making money. So powerful that Albert Einstein reportedly called compound interest the eighth wonder of the world.
For the most part, compounding only works with assets that that both appreciate and produce income.
There are effectively two types of assets: those that appreciate, and those that produce income.
When you own stocks that both appreciate and pay dividends you can begin compounding your way to wealth.
So far, you’ve seen the power that regular compounding has for increasing your wealth.
However, there’s a way to compound the compounding process. Here, it doesn’t just depend on the return on your asset, but how much that return can grow.
Let me explain.
While some investments quickly increase income, it’s unlikely that this income will stay the same year after year. In some cases, it will stay the same, as with bonds. In some situations, income will decrease over time.
But the assets I like increase their income payouts year after year.
These are assets like rental real estate, where you can increase the rent every year, or certain stocks that increase their dividend payouts every year.
The income paid by stocks is called a dividend. When a stock pays you a dividend, you can invest that cash back into the same stock to achieve compounding.
Let me give you an example of how this process can build your wealth…
Say you invest $100,000 in a fund that averages a 6.4% compound return every year — the low-end of what an S&P 500 index fund provides when you reinvest the dividends it pays.
After 30 years of compounding, your $100,000 would become $643,056.
That’s not bad. But you could do better.
Let’s say you find a single stock that pays a 6.4% dividend, but increases this dividend by 5% every year…
So that in year two the dividend is 6.72%, and in year three it’s 7.06%, and so on.
Look at the chart below, and you’ll be amazed at what this does to the value of your investments…
As you can see, the first few years start out almost exactly like regular compounding. Yet, over time, double compounding takes off like a rocket.
Even more impressive is the yield to cost, which is the size of the dividend compared to your original investment.
By year 30, you’re earning over $1,100,000 per year — in cash alone. That’s over 10 times your original investment!
So where do you find these double compounders?
In the stock market, there is a small group of companies that raise their dividends every year.
A 5-10% dividend raise is not uncommon among these companies, which means their payouts roughly double every seven to 12 years.
And remember, this scenario — which will make you a millionaire over time — doesn’t require you to dip into your pocket after your initial investment.
All you need to do is keep your hands off it and let your dividends do the work for you.
Below, you’ll find our four favorite double compounding stocks you can buy today.
Strategy No. 3: Get DIYwealth’s Entire “Coffee Can” Portfolio
If you’re looking for a full, top-to-bottom, no-stress, no-fuss investment strategy that holds your hand along the way — and that also happens to follow the rules above to tap into the greatest investment power of all time — look no further than DIYwealth’s very own Coffee Can Portfolio.
In each quarterly issue, we deliver:
Analysis about current market and economic conditions that may (or may not) be impacting our portfolio
Buy (and sell) alerts based on expert stock analysis
Buy recommendations for “Junior Legacy Companies” — the sort of companies Warren Buffett would buy if he were starting Berkshire Hathaway… today.
Stock-by-stock news regarding dividend payouts, mergers and acquisitions, and so much more…
Basically, you will know exactly what to buy and when… and the status of your portfolio every quarter… as your wealth continues to grow and grow and grow.
[1] https://www.jpmorgan.com/wealth-management/wealth-partners/insights/the-case-for-always-staying-invested
[2] https://www.ifa.com/articles/dalbar_2016_qaib_investors_still_their_worst_enemy/
[3] https://amzn.to/3MARrZC
[4] https://www.forbes.com/sites/rickferri/2012/12/20/any-monkey-can-beat-the-market/?sh=2670069b630a
[5] https://www.thegoodinvestors.sg/are-the-best-investors-dead/#:~:text=Fidelity%20supposedly%20reviewed%20the%20performance,or%20forgot%20about%20their%20assets
[6] https://www.investopedia.com/articles/investing/052216/4-benefits-holding-stocks-long-term.asp#:~:text=the%C2%A0S%26P%20500%C2%A0experienced%20annual%20losses%20in%20only%2011%20of%20the%2047%20years%20from%201975%20to%202022
[7] https://www.schwab.com/public/file/P-12613503
[8] https://etfgi.com/news/press-releases/2019/07/etfgi-reports-assets-invested-global-etf-and-etp-industry-reached
