How the Coffee Can Portfolio Approach More Than Tripled My Mom’s Money in 9 Years
About two years after I entered the investment industry and gained some experience, I suggested to my mom that I review her small traditional IRA portfolio to see how it was invested. What I found was that it was far too conservative given my parents' circumstances at the time. My parents were in their late 40s, my dad was set to retire with two pensions, their mortgage was nearing maturity within the decade, and they lived a relatively modest lifestyle. They could afford to take some risk with this smaller sum of money.
I offered to manage the investments on my mom's behalf and took over in January 2016. Initially, I built a diversified portfolio of exchange-traded funds (ETFs) with a 75% stock, 25% bond allocation. The portfolio remained this way until January 2017, when I had a follow-up conversation with my parents. They expressed that the money was not something they heavily relied on for retirement or immediate cash needs and encouraged me to take an even more aggressive approach if I chose to do so.
After another year of experience and delving deeply into Warren Buffett's philosophies, I felt confident enough to start researching and buying individual stocks prudently. I pivoted the portfolio to a small, concentrated all-stock portfolio of less than 10 holdings.
Now this is where the “Coffee Can Portfolio” concept comes in. The idea was first introduced by Robert G. Kirby, an investment manager and author. He wrote an article in the 1984 edition of The Journal of Portfolio Management, describing a client who secretly mirrored all his stock buy recommendations in his personal account but never followed his sell recommendations or sold anything.
The result was that the client's portfolio far outpaced Kirby’s professionally managed portfolio. Upon analyzing the performance, it was clear that some stocks completely tanked, a good chunk kept pace with the market, and a small subset significantly outperformed, driving most of the gains.
The Coffee Can Portfolio emphasizes a few key concepts for successful long-term investing:
Buy high-quality stocks at fair or cheap prices: Choose stocks you believe in for the long term, based on fundamentals and supported by in-depth research.
Buy and Hold, Don’t Sell: Let the portfolio grow undisturbed over time to avoid biases, such as selling a stock too soon because it seems overvalued. Companies like Amazon, Walmart, Microsoft, NVIDIA, and Costco may have seemed overvalued at times but grew into their valuations due to strong competitive positioning, continued reinvestment for growth, innovative business models, and long growth runways. I’m not implying that you never sell, but to be cautious of your reasons for selling and tie them back to fundamentals.
The Coffee Can Itself: This is a metaphor. Think about the old-fashioned coffee cans where people would stash their valuables and seal them up. The valuables remained untouched for many years. This is like Warren Buffett’s punchcard approach, where he advises students to imagine they have a card with 20 punches, and each investment decision uses up a punch.
“I tell them that they would all be better off if when they got out of school somebody gave them a card with 20 punches on it and every time they made an investment decision, they used up a punch.” - Warren Buffett
The Portfolio
Since January 2016, my mom’s portfolio has returned nearly 16% per annum, beating the S&P 500’s return of 14.5%. I will caveat that by saying for the first year, the portfolio was 25% in bonds. And for about the past year or so she has been nearly 40% in cash (a mistake given what stocks did in 2024), as she changed her mind and expressed a possible desire to utilize these funds when eligible at 59 1/2 years old. So that’s only 7 of the 9 years fully invested in 100% stocks, which makes the results even more impressive when compared to an all-stock index like the S&P 500. Of course, in hindsight, I wish I bought all of the stocks that drove her returns in January 2016 and held until now given how much they have compounded.
To keep this short, I’m going to name the 3 stocks I bought and held that drove most of the returns in her portfolio over the past 9 years and the rationale for why I bought them when I did:
Apple (+640% return)
The first security I purchased in January 2017 was Apple. This idea was, in part, a shameless cloning combined with my own fundamental views. Warren Buffett had recently purchased the stock and another investor I admire named John Huber of Saber Capital Management owned the stock for his clients as his top position. My mom’s portfolio still holds the stock to this day and is up over 640%. At the time of investment, I held some of the following beliefs:
Apple was truly a Consumer stock, not a Technology stock. Its main competitive advantage lies in that sleek gray Apple logo, not just its hardware.
At the time Apple had ~15% share of the global smartphone market but dominated something like 80% of the profits. Think about that…
Apple's services segment, including the App Store and Apple Music, generated recurring revenues and was growing rapidly and highly profitable.
Apple provides significant value to its customers, which was reflected in its strong customer loyalty. The smartphone replacement cycle fears seemed overblown to me. Our lives are in our iPhones and we were paying over $1,000 for these tiny devices that control our entire lives.
The company had a substantial amount of net cash that could be returned through buybacks and dividends.
On a net of cash basis, the effective price-to-earnings multiple (P/E) was in the high single digits. And on a free cash flow basis (excluding excess cash) it traded at about 10x free cash flow.
Autozone (+503% return)
I bought Autozone in 2017. Some of my rationale for this selection was:
AutoZone was a leading retailer and distributor of automotive replacement parts and accessories in the U.S., with a strong presence in the DIY (Do-It-Yourself) and DIFM (Do-It-for-Me) markets.
AutoZone continued to re-invest and expand its footprint, opening 84 new stores in the U.S., 25 in Mexico, and five in Brazil during 2017. The company operated 524 stores in Mexico and 14 in Brazil at year-end.
Store growth took up such a small percentage of cash flow that the company had significant excess cash to continue to invest in its existing assets by buying back a significant and aggressive number of shares outstanding at low valuation levels. The company cut its shares outstanding in half over a decade-long period, significantly increasing value for its remaining shareholders.
The company was delivering an after-tax return on invested capital (ROIC) of nearly 30%, reflecting efficient use of capital and strong profitability.
NVR (+280% return)
I bought NVR Inc. on March 18, 2020 during the worst days of the pandemic. Some of my rationale for this selection was:
NVR Inc. was one of the largest homebuilders in the U.S. with locations in 14 states (mostly in Eastern U.S.).
NVR was a unique homebuilder in that it employed a capital-light model. The company does not engage in land development. Rather, they typically acquire finished building lots at market prices from various third-party land developers pursuant to fixed price finished lot purchase agreements. In layman’s terms, they buy land that has already been pre-developed and ready for use.
NVR pre-sells nearly all its homes. This is different from other homebuilders who participate in some speculative construction. Before NVR begins construction, an order must be placed and a deposit must be made. This reduces risk and working capital requirements, further enhancing returns on capital.
NVR prefers to build in established and contiguous markets, mainly in the Eastern U.S. and has avoided expanding into the more volatile Western markets. NVR is the top player in more than half of the markets they serve. In the rest, they are typically the #2 or #3 player.
NVR had a long-tenured management team with very high levels of insider ownership of the stock (well-aligned with shareholders).
NVR’s long-term incentive plan was rock solid. The incentives are issued periodically, not annually. They are issued as stock options, with 50% of the grant in the form of performance-based stock options. Performance-based stock options have a 3-year performance period and they vest over 4 years, with a pre-vesting period that results in 5-6 years between grant date to final vesting date. This increases retention by providing the opportunity for wealth creation through the long vest period.
The stock price was nearly cut in half during the pandemic, yet housing dynamics were set to become increasingly favorable after the pandemic. Remote work allowed people to move into suburban or rural areas, interest rates plummeted, people desired more space as they were spending more time at home, and housing supply continued to remain constrained.
Conclusion
While the Coffee Can portfolio approach can create an extremely concentrated, volatile portfolio that is not for the faint of heart, I think you should take away several points as to why this strategy can be successful if you do your homework on the names you buy and understand the inherent risks:
Long-term investing helps investors avoid common pitfalls of frequent trading and market timing, allowing the power of compounding to do its work.
Investing in stocks with high returns and high reinvestment opportunities requires extreme patience. Wal-Mart did not build 10,600 retail stores overnight.
The patience and discipline to not sell. This helps you sit through stock fluctuations and market downturns. It also trains you to not listen to short-term noise and news flow. The news puts out 4x more negative news than positive news. Again, this doesn’t mean never sell.
Not actively trading your stocks minimizes transaction costs and taxes, which can erode returns over time.
Overall, the Coffee Can Portfolio approach is successful because it leverages the power of compounding, focuses on high-quality companies, and encourages a disciplined, long-term investment strategy. Check out Chris Mayer’s book 100 Baggers: Stocks That Return 100-to-1 and How to Find Them if you want to learn more!
What type of investment approach do you employ in your own portfolio?
Disclaimer: The information provided in this blog post reflects my personal opinions and does not represent the views or opinions of my employer. This content is for informational purposes only and should not be considered as investment advice. Readers are encouraged to conduct their own research and consult with a financial advisor before making any investment decisions. Additionally, I disclose that I hold positions in NVR in my personal portfolio.