“The coffee-can portfolio” is all but forgotten today…

The term first appeared in a 1984 article by money manager Robert Kirby. He says it comes from the Old West, when folks put their most valuable possessions in a coffee can and hid it under their mattresses.

In the mid-1950s, Kirby had been actively managing a client’s money for about 10 years with the goal of wealth preservation.

One day, the wife called to say her husband died and she had inherited his estate.

Kirby looked at the husband’s portfolio. The husband had invested in the same stocks Kirby’s firm had recommended to the wife. But instead of actively trading them, he had put about $5,000 into each stock, stuck the stock certificates into a safe deposit box (the “coffee can”), and left them.

The two accounts invested in the same stocks. One was actively managed by Kirby using his firm’s buy and sell recommendations. The other was simply held for more than a decade.

Kirby didn’t publish the results of the wife’s portfolio, nor a comparison of the two. But he was shocked by the excellent results of the husband’s coffee-can portfolio…

Remember, the husband put about $5,000 in each stock. Sure, some of the positions fell to about $2,000. But several went to $100,000. That’s 20 times his initial investment. One stock – Haloid Photographic, later known as Xerox – went to $800,000. That’s 160 times his initial investment.

There are two important lessons we can learn from this story…

The first is that an actively selected portfolio must be allowed to develop over a much longer period of time than most people allow. You don’t generally make several times your money in less than several years. It takes patience.

The second is this: What most people call “news” is really just “noise” to investors.

The majority of what’s in the Wall Street Journal, the Financial Times, the New York Times, and TV news channels doesn’t mean much for the markets over the long term. People pay too much attention to this noise. They buy and sell stocks based on it.

That’s a big mistake.

Instead of building a portfolio of great businesses that compounds for decades, people wind up selling out at the slightest sign of trouble based on the noise of the moment. Often, they lose money because of it.

But there’s no noise in a coffee can…

A coffee can sits out of the way, under the mattress, untouched for years, hopefully for decades.

It doesn’t read the news. It doesn’t have any political viewpoints to share. It couldn’t care less what’s going on in the world.

All that matters for a coffee-can portfolio is that you fill it with good businesses that have long-term growth potential regardless of short-term events.

According to the classic book Triumph of the Optimists, by Elroy Dimson, Paul Marsh, and Mike Staunton, U.S. stocks appreciated 1.5 million percent in the 20th century. That period saw wars, influenza outbreaks, the Dust Bowl, the Great Depression, inflation… you name it. And still, U.S. stocks were up 1.5 million percent.

It’s not that disasters like these don’t matter. But over the long term, the coffee can’s active stock picking and silent, passive compounding trumps most of humanity’s noise.

If you’re still not convinced, here’s why this is important to your portfolio…

Most investors don’t hold stocks long enough to earn big multibaggers. Based on Reuters’ analysis of New York Stock Exchange turnover figures, the average holding period for stocks as of 2019 was about eight and a half months.

The average holding period dropped to just five and a half months in June 2020.

That won’t cut it. Even the three- and five-year holding periods you often hear from hedge-fund managers aren’t adequate.

You need to hold for 10, 15, or more years to make multibagger, coffee-can-style returns.

Selling at the onset of loud market noise is one reason folks can’t tolerate holding stocks for the long period of time necessary for big compounding. Based on the noise of the moment, they get scared (needlessly, most of the time) and change their portfolios before the true compounding can accrue.

Investors should put down their smartphones, stop getting up-to-the-minute stock quotes, and restyle themselves after Warren Buffett, who once wrote…

“Lethargy bordering on sloth remains the cornerstone of our investment style.”

So my most urgent message today is: Stop listening to the noise, and start building a portfolio of great businesses you can hold indefinitely.

Good investing,

Dan Ferris

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Source: Daily Wealth