Simple Portfolio #5: Coffee Can Portfolio
Let your winners run
Welcome back to the Simple Portfolio series by Market Sentiment. In this exclusive 5-part series, we are focused on finding and evaluating the performance of some of the best portfolios on the planet — but the best doesn’t have to be complicated.
For our final #5 issue, we take a close look at the Coffee Can Portfolio.
“Let your winners run, and cut your losers. It’s easy to make a mistake and do the opposite, pulling out the flowers and watering the weeds.” - Peter Lynch
In 1955, Tino de Angelis started the Allied Crude Vegetable Oil Refining company to take advantage of the U.S. government’s Food for Peace program. The goal of the program was to sell surplus goods in the U.S. to Europe at low prices to help them rebuild the economy after World War 2. By 1962, Tino’s Salad Oil Company was big enough to be involved in the commodities market.
By then, Tino had developed a cunning plan. He used his existing large pile of inventories of salad oil as collateral to get loans from Wall Street firms and buy Oil Futures so that he could drive up the price of his inventory. So, ships full of salad oil would dock in the port, inspectors from the banks would certify the quantity of the cargo, and then the banks would issue loans against these assets.
The inspectors just missed out on one simple thing - Oil floats on water.
Tino was fooling everyone by filling his tanks with water and then putting oil on top of it. If the banks had done even basic due diligence, they would have known that the total salad oil inventory reported by Tino was more than the holdings of the entire country. By the time Tino’s gig was up, they were supposed to have $150M in inventories but only had $6M. The futures market crashed and wiped out the entire value of the loans that de Angelis had taken.
A massive portion of the loans were funded by American Express. When Allied filed for Chapter 11 bankruptcy, AmEx was on the hook for the loans issued. AmEx nearly went under, and the stock dropped more than 50% due to the scandal, and that’s when Warren Buffett came in. Buffett took a 5% stake in the company for $20M and played an active part in repaying the creditors and building back the trust in the company. His bet paid off, with AmEx stock jumping from 94 cents in ‘63 to $5 in ‘68, and Buffett exited his position.
Even though Buffett’s investment was an incredible success, what’s interesting is that AmEx has increased another 17x since Buffet sold his investments. The company has returned a CAGR of 13% compared to the 10% returned by the market. Buffett did end up buying back into the company in 1998 and currently owns ~18% of AmEx. Even someone like Buffett, who is famous for holding on to his investments and loathe to sell, ended up selling too early.
While there are certainly places where selling makes sense (retirement, portfolio rebalancing, etc.), in most cases, holding on to your investments gives the best long-term returns. The problem is that there is too much information available easily, and most investors tend to give undue importance to news, earnings reports, and analyst expectations. It's important not to confuse market-moving events with actual intrinsic value-moving events. Most of the time, it pays to ignore the sensationalized headlines.
One way to defend against this folly is to use the coffee can portfolio.
Coffee Can Portfolio
Coffee can investing was popularized by professional fund manager Robert Kirby in the ‘80s.
The Coffee Can portfolio concept harkens back to the Old West, when people put their valuable possessions in a coffee can and kept it under the mattress. That coffee can involved no transaction costs, administrative costs, or any other costs. The success of the program depended entirely on the wisdom and foresight used to select the objects to be placed in the coffee can to begin with. - Robert Kirby
Kirby saw the impact of this process from one of his clients with whom he had been working for more than 10 years. When the client’s husband died suddenly, she asked Kirby to take a look at his portfolio. Kirby was amused to find that the husband had piggybacked on all his recommendations but with one small change - He had neglected all the sell recommendations from Kirby.
The results were stunning.