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Norm Speaks
A few weeks ago I was engaged in one of my favourite activities, browsing through a used bookstore. My search was rewarded when I found "Classics: an investor's anthology" which was edited by Charles Ellis and published in 1989. The book contained a variety of articles written by investment heavyweights in the last century. Apart from articles by Benjamin Graham and Warren Buffett, I was most influenced by Robert Kirby's discussion of the Coffee Can Portfolio which was first published in the Journal of Portfolio Management in 1984.
Robert Kirby thought that investors would be well served by purchasing small amounts of many stocks and then forgetting about them for ten years. While discussing his investment counsel business he related an interesting anecdote.
"I had worked with the client for about ten years, when her husband suddenly died. She inherited his estate and called us to say that she would be adding his securities to the portfolio under our management. When we received the list of assets, I was amused to find that he had secretly been piggy-backing 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.
Needless to say, he had an odd-looking portfolio. He owned a number of small holdings with values of less than $2,000. He had several large holdings with values in excess of $100,000. There was one jumbo holding worth over $800,000 that exceeded the total value of his wife's portfolio and came from a small commitment in a company called Haloid; this later turned out to be a zillion shares of Xerox."
I found the article to be appealing because I know many people who became wealthy following a similar approach. On the other hand, I know of very few who have succeeded by following their broker's advice. Anecdotal evidence for sure, but there are other reasons to consider putting stocks into a safe-deposit box and forgetting about them for a decade.
Simply deciding that you'll hold a stock for ten years makes a big difference. The prudent long-term investor will select stocks of profitable companies with little debt. This list can then be pared down by removing companies that produce products that are unlikely to be in demand throughout the next decade. Such an approach automatically steers investors away from risky companies with limited operating histories and unproven businesses.
The Coffee Can approach is almost custom-made for the dividend reinvestment plan (DRIP) investor. The only downside is that there are relatively few Canadian companies that offer dividend reinvestment plans. As a result, investors should exercise patience when building a DRIP portfolio and expect to buy only a handful of reasonably priced stocks each year.
Overall, the Coffee Can approach holds great appeal because it doesn't cost much to maintain, it defers taxes and requires relatively little effort.
First published in June 2002.
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A Dan Hallett and Associates Inc. publication. Norm Rothery, Ph.D., CFA, is the Chief Investment Strategist at Dan Hallett and Associates Inc. (DH&A) and the founder of StingyInvestor.com. DH&A is registered as Investment Counsel in the province of Ontario. Norm, DH&A, or related-parties may have an interest in the securities mentioned. More...