The Coffee Can Portfolio
Back in early December 2014, the markets hit highs of 208.47 on the SPY (the broader market ETF).
Approaching mid-May and it looks like we will open right around 209.20, which is less than one-half of one percent higher than five months ago.
Now that's what I call a trade range.
If you add in another two percent it takes you all the way back to September.
In other words, the markets are kind of stuck between the latest bout of altitude sickness (new record highs) and the end of the world due to oil prices, bond prices and/or currency prices.
To me it's like a broken record scratching over the same self-inflicted wounds we gave ourselves years ago.
Years may pass before all this worrying about the next Apocalypse fades.
For more on that check out our expanding list of podcast episodes on iTunes here!
My Feeble Suggestion?
Armageddon has been greatly exaggerated.
And the frothy fearful headlines welcoming the summer doldrums are an opportunity for us to methodically buy up what others are throwing out the window as they run away from perceived "risk".
The Coffee Can
Warren Buffett once said:
"If you are not willing to own a company for 10 years, don't even consider owning it for 10 minutes."
Or there's the "Coffee Can Portfolio".
It goes something like this:
The coffee can portfolio concept harkens back to the Old West, when people put their valuable possessions into a coffee can and kept it under the mattress.
The success of that strategy depended entirely on the wisdom and foresight used to select the objects they put in the coffee can.
The idea is simple enough to apply to investing: You find the best stocks you can and let them sit for 10 years. You incur practically no costs with such a portfolio. And it is certainly easy to manage.
The biggest benefit, though, is a bit more subtle and meaningful: It works because it keeps your worst instincts from hurting you.
The theory was first written about back in the 1950's by a guy named Robert Kirby. In his paper, he told the story about how this idea came about.
Kirby worked for a big firm that counselled individuals on their investments.
A client he'd worked with for 10 years, whose husband had died suddenly, had inherited his stock portfolio, which she moved across to Kirby's care.
Looking at the portfolio, Kirby wrote: "I was amused to find that he had been secretly piggybacking [on] 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 and forget it.
"In doing so, a wonderful thing happened. Yes, it meant his portfolio had a number of broken stories worth $2,000 or so in small positions.
"But he also had a few large holdings worth $100,000 each.
"The biggest surprise of all, though, was this: He had one enormous position of $800,000 that was, on its own, bigger than the total value of his wife's portfolio.
"[It] came from a small commitment in a company called Haloid; this later turned out to be a zillion shares of Xerox."
It's an inspiring tale. And it highlights the most disquieting part of the investment world. The secret so many people on Wall Street abhor because they're all about movement.
The Lesson in a Can?
The coffee-can portfolio is designed to protect you from yourself - the obsession with checking stock prices, the frenetic buying and selling, the hand-wringing over the economy and bad news.
It forces you to extend your time horizon. You don't put anything in your coffee can that you don't think is a good 10-year bet.
It is important to also note that poor Kirby had been diligently managing the wife's account - keeping up with earnings reports, trimming stocks, and adding new positions.
He'd have been far better off with the idler's creed.
The Ultimate Play on Your Enemy?
We have met the enemy, and the enemy is us.
Kirby is the antithesis of the trader, of those who chase what's hot and what's moving.
By example, in another paper of his that I found, he writes:
"I believe an article by Benjamin Graham that I read many years ago carried the opinion that the development of liquid, high-volume auction markets for shares of publicly held American companies has been about the worst thing that has ever happened to the investment business. I have a great deal of sympathy with his observation."
Does That Mean Markets Are Rigged?
Not at all.
It means that markets, for the impatient folks, provide you a battlefield with your very worst enemies: Your emotions and your fears.
When you know you can sell something almost instantaneously, it messes with how you think about the purchase in the first place. You can be careless because you can get out quickly.
If you knew that every time you bought a stock you would have to hold it for a year, you would buy with much more diligence.
That's a simple idea. We have decades of evidence that proves one thing: It is almost impossibly hard to live by this rule.
Too Much Noise?
As humans we want to feel we have control of the future. We don't. We have to simply trust it as it unfolds. The markets will send your mind through hurdle after hurdle, ringer after ringer.
It is a never-ending puzzle.
And with constant measurement of returns and the oppressive 24/7 media cycle, the pressure to act is immense.
When your mindless neighbour doubles his money in XYZ in two months, the idea of an internal rate of return seems irrelevant and even pointless.
But then again, these are exactly the kinds of defeatist sentiments that bubble up during years of stock market exuberance, like 1929, 1999, and 2007.
Ironically, this is just when such unfashionable ideas are most important.
Resist the urge to act.
It's this kind of careful thinking, along with plenty of patience and discipline, which will make you money over the long-term.
Stay Patient....pray for a correction….and check out our expanding list of podcast episodes on iTunes here!