The easiest way to make money in the stock market is to invest in companies for the long term.
Even Warren Buffett says there are only 3 things you need to be a successful investor:
Time, Patience, and Compound Interest.
Your best bet is to look for strong income investments – companies that are growing and pay dividends and/or interest to shareholders.
I’m a BIG believer in income investing.
I’m also a big believer in long-term investing.
When I have to sell a stock, it usually means one of two things…
- I made a mistake when I bought it. The quicker I need to sell, the bigger the mistake.
- I’m profit-cycling. Just selling enough shares to protect my initial capital and letting the position run on profits.
But in rocky markets like the one we’re currently in, what do you do?
Lades and gentlemen, allow me to present the Coffee Can Portfolio.
The Coffee Can Portfolio
The biggest obstacle to growing your money in a stock is usually the inability to just hold on during the ups and downs of the stock market.
I see it all too often.
People seeing a downturn – a few days of red – and panic selling.
There is an old story that may help.
Robert Kirby, was a portfolio manager at Capital Group, one of the major investment management firms, in the 1980's.
He initially came up with the coffee can idea since a coffee can was used to store valuable items in the olden days.
I remember my Gramma had an old coffee can on a kitchen shelf that was literally full of money.
Sometimes I’d climb up there just to peel the lid back and look at all that cash. It was pretty cool.
Although looking back now, I sure hope that wasn’t her dash stash.
The Coffee Can Portfolio system is simply finding your stock soulmates.
The ones that you’ll hold forever because you lurve them.
These are the stocks that you’d hang onto no matter what.
The stocks you stick in your “coffee can” and let grow and compound undisturbed forever.
The stocks that your heirs would be stunned to learn about at the reading of your will.
“I had NO IDEA Uncle Jimmy had 2,000 shares of Boeing!”
The moral of the coffee can story is that buying your soulmates and sticking them in your can is much better than constantly buying new stocks just to sell them within the next few months.
Here’s what really drove the concept home for me…
Kirby discovered that an investor had invested in several stock picks from his fund.
However, the investor completely ignored the “sell” alerts and held the positions.
After 10 years, the results were pretty amazing.
There were some loser stocks, but many of them did crazy well.
WAYYY more winners than losers. And LOTS of capital gains and income.
I personally believe that it's better not to sell in volatile markets.
It’s really difficult to predict the right time – to buy OR sell in any market.
And even if the market slides 30%, you won't notice that in the next 10 years if you invested in the right company.
What’s in My Coffee Can
I have a couple stocks in my coffee can portfolio:
Let’s take a deeper dive into one so you can see why it made it in my can. (This is the best metaphor ever.)
Costco operates warehouse clubs worldwide.
Currently, Costco operates 527 membership warehouse clubs in the United States, 100 in Canada, 39 in Mexico, 28 in the United Kingdom, 26 in Japan, 15 in Korea, 13 in Taiwan, 10 in Australia, 2 in Spain, and 1 each in Iceland and France.
Costco is the third-largest retailer in the United States, with over $140 billion in revenue last year.
In the U.S., base and executive memberships cost $60 and $120 per year, respectively, and give members access to a range of merchandise priced at below-average markups.
The company sells food, fuel, and general merchandise to its members but derives most of its profits from membership fees.
Here are a few reasons why I love the company:
- The average markup on a Costco product is in the low teens when WalMart’s average markup is in the high 20’s.
- Costco’s membership renewal rate is a crazy-high 90%.
- I like having 10 Degree deodorants on hand at all times.
- Costco has a wide economic moat which means that their cost advantage and brand are difficult to knock off.
- Costco generates over $1,200 in sales per square foot and inventory turns 12 times which is way better than their competitors that generate less than $600 sales per square foot and turn items 8 or less times every year.
- Costco has a strong culture and employee satisfaction is extremely high leading to low attrition rates (like 5% vs 50%).
- Revenue growth is great and dividends, although small, are consistent with plenty of room for growth.
- Buying huge flats of blueberries and eggs makes me happy.
- Their house brand Kirkland Vodka is Grey Goose in disguise. (Why spend $60 on GG when you can get it in a Kirkland bottle for $37?)
- Costco used the recent tax cut to raise hourly wages to $14 for more than 130,000 employees.
This isn’t meant to be a full analysis of Costco, just to show you how these factors combined to create a suitable candidate for my coffee can portfolio.
How Much Do I Allocate to My Can?
No need to put all your money in a coffee can portfolio.
Just a portion that you will not need for the next several years.
However, it’s very likely that this part of your investment portfolio will be the best performer.
The whole idea of the “set it and forget it” Coffee Can Portfolio is to protect investors from the emotions and volatility of the markets that make them buy at the top and sell at the bottom.
(Trying to) Time the Market
Of course, it would be nice to be able to buy at the bottom and sell at the top, but that is WAYYY easier said than done.
So, how do we know what the heck is actually going on with the market?
Here are four indicators to look at.
Shiller S&P 500 PE 10 Report
This indicator monitors how expensive stocks are at the moment, based on their earnings.
The Shiller P/E ratio takes inflation into consideration and it takes average earnings of the S&P 500 companies from the previous 10 years into account.
S&P 500 Cyclically Adjusted Price-Earnings Ratio is at a current level of 30.57, a decrease of 2.71% from last month.
This is a decrease of 2.34% from last year and is higher than the long term average of 16.91.
The VIX Index
The CBOE Volatility Index, known by its ticker symbol VIX, is a popular measure of the stock market's expectation of volatility implied by S&P 500 index options, calculated and published by the Chicago Board Options Exchange.
Us less fancy and wordy folk refer to it as the panic index, the fear index, or the fear gauge.
Typically, options serve as insurance since they can protect the option buyer against a price decline.
If investors fear a decline in price, they want to buy options. The higher the demand for options is, the higher values the VIX index shows.
The VIX index can kinda predict a major market crisis.
The VIX had high numbers (above 22) for several months ahead of the dot-com collapse in 2000 and the stock market crash in 2008.
Today, that’s not our situation as the VIX index has been showing relatively low numbers lately.
Today the VIX is at 18.5.
The advance-decline line is an indicator based on the number of advancing (rising) stocks minus the number of declining stocks.
The main thing to pay attention to is when the stock market moves up while the advance-decline line moves down.
Then we got a situation, yo.
Today the market and the advance decline line are both up.
Today, interest rates are considered the major cause of the stock price decline.
The market doesn’t like surprises and when the Fed springs a rate hike, things get weird fast.
Currently, the economy is doing well and unemployment is the lowest its been since 1969.
So, increasing interest rates seems to be the thing to do. And the Fed has done just that.
Higher interest rates are to the stock market what Lex Luther is to Superman, and even though they have been steadily declining for the last 30 years, there usually were spikes before a stock market crash.
What to Do Now
The answer will be different for a trader than for an investor.
Traders generally use the indicators above to try to time the market to make money trading in and out of positions on a daily or weekly basis.
Investors, who are in it for the long-haul (like me), are looking for our stock soulmates to stuff in a coffee can and hold for a long, long time.
Looking for your stock soulmates? You should join Academy or subscribe to one (or more) of my premium newsletters.That’s where we find love matches for our coffee cans.