THE RIGHT WAY OF INVESTING IS NOT SOPHISTICALLY SPECULATE!
Today, we talk about a smart lawyer (certainly his name was not Harvey Spector) who hired an investment firm for handling his wife’s portfolio. He duplicated the recommendations the company sent for his wife’s portfolio, with a little twist. He had invested a sum of $5000 in each purchase recommendation but never sold anything from his own. He piggy-backed everything secretly. On his death, his wife wanted the money manager Robert Kirby to handle the stocks she had inherited from her deceased husband. Here’s what happened next:
It’s astonishing, that in the end, the lawyer’s portfolio exceeded the wife’s portfolio multiple times in value. Several small holdings of less than $2,000, large holdings in excess of $100,000 and one jumbo holding worth over $800,000 that exceeded the total value of wife’s portfolio that came from a small commitment in a company called Haloid; this later turned out to be a million shares of Xerox.
This very incident in the mid- 1950s inspired Robert Kirby, a veteran investment manager, very much and he came up with the wild idea of coffee can investing.
“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.”
In his article, Kirby also shared how he would use the Coffee Can Portfolio concept to build an actual portfolio. His solution: (1) Select a group of 20 stocks with desirable investment-qualities, (2) buy them all in equal proportions, and then (3) simply hold the shares for a decade or more. Kirby’s reasoning that such a portfolio will do really well has two legs:
“First, the most that could be lost in any one holding would be 5% of the fund. Second, the most that the portfolio could gain from any one holding would be unlimited.”
The notion that a” Coffee Can” portfolio can outperform an actively managed portfolio selected by the same investment management organization (at least over some particular time horizon) is not without a basis in logic. The basis is really simple.
Invest for the long run, 10 years or more, in sound businesses that have consistently grown for the last decade and keep the portfolio concentrated to 10-15 stocks. In plain speak, Coffee Can investing is a high-quality, low-risk, buy and forget strategy.
But here’s the twist. Kirby did not put his solution into action, even when he thought it was a brilliant idea. There were two big problems. First, Kirby thought that the hurdles involved with assembling a team of investment professionals who can excel in constructing a long-term portfolio is too high to overcome. Second, there was a massive career risk for him. “Who is going to buy a product, the value of which will take 10 years to evaluate,” Kirby wrote. On the other hand, most of us are faster than Wyatt Earp ever dreamed of being when it comes to taking a profit. The concept of being a
long-term partner in a sound and growing business enterprise seems as far away as the Stone Age.
Clients are spectacle about the kind of results would good money managers produce without all that activity? If they are ever going to buy the wild idea of coffee can portfolio, money managers will have a tough time negotiating their fees, very essential to run a firm with mature and expert professionals. Nevertheless, the biggest earners in today’s world are not rock musicians or professional athletes. Our system accords the highest earnings to money managers. I know perhaps a million people whose earned incomes exceed $2 million per year. All of them are money managers.
Admittedly, there is a difference between the way we managed individual portfolios 20 or 25 years ago and the way that institutional funds are managed today. While today‘s methods are different, it is not at all sure that they are a whole lot better. We are still doing many of the same things today for institutions that we did for individuals years ago. The primary difference is that we make our decisions on a much shorter time horizon. The old concept of averaging down has faded, to a fair degree, because that is hardly the way to get next month’s market winners.
There are two reasons why so many institutional clients are disappointed by their money managers, and why so many money managers are hired and fired every month. First, money managers have created expectations that far exceed their abilities. Second, they have encouraged the measurement of results on a short time horizon that is a far greater reflection of luck than skill. They start with sound research that identifies attractive companies in promising industries on a longer-term time horizon. Then, they trade those stocks two or three times a year based on month-to-month news developments and rumours of all shapes and sizes.
The big question here is: Are we traders, or are we really investors? Most good money managers are probably investors deep down inside. But quotrons and news services, and computers that churn out daily investment results make them act like traders. The higher investment returns that should be the logical product of superior research analysis are dissipated in trading activity. That classic question, “Where are the customers’ yachts?” is alive and well. We‘re making the brokers rich! That is one point on which the advocates of both passive and active portfolio management can agree. This problem occurs precisely because few money managers are willing to make a long-term decision. Our business needs to encourage investing, both for our benefit and for the benefit of our clients.
To beat the market is not easy. In addition to a good investment manager, the investor needs perspective, patience, conviction and courage- qualities that do not abound in today’s intensely competitive world.
The revelation that buying and then patiently holding shares of great companies for the long-term had generated vastly superior returns as compared to more active buying-and-selling helped Kirby to form the basis for his Coffee Can Portfolio idea.
