Coffee Can investing was first popularized by Robert G. Kirby in an article he published in the fall of 1984.
Coffee Can investing riffs off of an old-fashioned saving method where you physically earmark some money, put it in a coffee can, and basically forget about it. And only consider opening it either after a long time or when you desperately need the money.
Converting that concept into an investing strategy, this is how it would look like.
You would begin by allocating money to a number of high-quality companies and forget them for a period of 10 years. No buying or selling during this period. “Just” hold on to dear life.
Then you might ask, why not invest an index fund and hold that for 10 years. Well, for most people, the index fund is still a very good option. But the upside of how much an index can run in a span of 10 years is capped. This cap is typically due to the fact that the growth and return of an index fund in averaged among all of it’s constituents. Despite a few high performing companies, the index would still move slower.
However, the coffee can strategy does have an elegant logic behind it. Consider that you have $100 Million dollars to invest. If you split that into 50 investments in high quality companies worth $2 Million each. The maximum you could lose in one holding is only 2% of the total portfolio while the upside is uncapped. Chances are that at least a couple of the holdings turn out to be a multi-bagger and provide a net profit at the end of 10 years.
An advantage of this kind of investing is that the amount compounds over time and fetching every dividend along the way. Compounding works well when it is not disturbed.
A detriment to an investment strategy are it’s transaction costs. A great strategy with too many transactions would then begin to eat up the gains anyway. Coffee can investing solves that buy reducing transactions to the absolute minimum.
A downside is that it requires you to invest a lump sum amount up front. In addition to that it does take time and effort to figure out which companies are “high quality”. But it is doable.
One use case that will for sure be filled with cryptocurrencies like Ethereum in the coming years is that of internet money.
Just like we had an era of web-first applications and shops, which then became mobile-first. Internet-first money is yet be fully realized. Money that is not tied to a physical entity per se, but at the same time can store and be a medium of exchange of value over the internet.
Money, Paypal credits, Credit are all good forms of value individual users or businesses use to transfer wealth between each other. This can be done via online too but the underlying mechanism is still tied to bank accounts and balance ledgers maintained by different banks. The internet only acts as a proxy for the transaction.
Internet money, on the other hand has the capability to sustain the transaction and it’s underlying mechanism end-to-end within the internet. Imagine if API’s wanted to exchange money and not users or businesses. Internet money would be the default way to do it.
By the looks of it, cryptocurrencies are the most poised to fill in this use-case.
Pricing power allows businesses to price their product or services higher than the rate of inflation and that of the competitors without reduced sales. Pricing power can come from a few ways. A very high quality product. A patented efficiency or feature of convenience that competitors cannot match. Or when a business is operating as a monopoly and barrier for entry is quite high.
A key indicator of the strength of a business is its pricing power That said, it does not mean that if a business does not have good pricing power it is a bad business. However, the opposite has a much higher probability to hold true.
In some businesses untapped pricing power is a good indicator that it is mispriced by the market. To reach such a conclusion one must have an idea on the costs and margins of that particular business against the backdrop of it’s competitors.
High pricing power can materialize as high ROIC over the years. But keep in mind that, high ROIC can be a result of many other factors. Operating and gross margins also provide an indication of the pricing power a company has.
A layman idea that has permeated the investing world is that if you are using a product or service then and you enjoy it, then you should own the stock of the company behind it. This is a good example of why Albert Einstein said “Everything should be made as simple as possible, but no simpler“”. By making a concept simpler than it should be, it has omitted some important aspects of it.
There are a few shortcomings to this idea. The fact that you like it does not mean everyone else likes it. And is also not any indication of what the business might expand into later. It does not give an idea of what it’s competitors are. Maybe the competitors don’t sell or market to where you live.
The business behind it can tell a totally different story. They can be debt ridden. Found malpractice. Or fighting a patent lawsuit. Anything is possible.
Households names are a good starting point. There is something in you that made you purchase the product or service. That in itself is a pre-requisite for a good product. But analysis shouldn’t end there. Looking into the financials and the story of a business is key to investing as much as having a mouth feel of the latest flavour of coke.
Market capitalization is the total cash-value of a business. AKA market cap. The market cap is calculated by multiplying the current number of shares outstanding by the price of one share. For example, a company having 1000 shares of 10$ value would have a market cap of 10,000$.
Companies are usually classified based on their market as small-cap, large-cap etc. Microcap refers to a companies that have much smaller capitalizations. In the U.S. it refers to companies having a market cap of roughly 50-300M$.
Microcap companies are not that popular. And not that well.covered by mainstream media. Hence the volumes traded on these stocks are quite low. This can be risky as it might be hard to offload or buy into large positions.
Since the companies are not that well-covered, the data on these companies are generally good. Less noise overall. And these companies are usually easier to analyse as they have simpler businesses and product lines compared to larger companies.
Unit Economics is a neat way to look at the fundamental economics of a business. A sanity check. It starts with defining a “unit”. A “unit” could be a product sold or a customer acquired depending on the kind of business and business model. Unit economics would then describe how much value is created from this “unit”.
Unit economics help you understand how much has to be given to perform a unit transaction that is core to the business. Especially when analysing a business, unit economics provide a quick way to check the feasibility of the business. It would be quite clear if an insane amount of money has to be put into for acquiring one customer. Or if the charges on logistics were eating up too much of the margins.
The unit economics and it’s various components can be projected out in the future. This will give you a fair idea as to how the business would have to perform to stay solvent. Whether that is realistic or not is another question. Comparing figures in a per-unit basis eliminates the possibility of comparing different things all together. We do not want to compare apples to oranges.
An example of a unit economics for a restaurant would look like this. From a basic sense, a restaurant cooks food for their customers with a marked up price to earn a profit for the product(the meal) and service. So the margins of a restaurant meal would be the difference between the price of the meal and the cost that it took for the restaurant to make it. The cost can then be broken down into the hourly wage of the workers, the cost of running a kitchen, the cost of the ingredients etc. This would give us an idea as to how much would have to be spend and what each dish has to be priced to obtain a margin that would justify running a restaurant business.
In the realm of financial assets, value is a function of the cashflows the asset can produce from now until it’s applicable end of life discounted appropriately to today’s worth considering factors like risk, growth.
Price is determined by the equilibrium of supply and demand. More supply than demand, the price goes down. More demand than supply, the price goes up.
Most of the time, these two numbers will not be the same. In other words, most financial assets are mispriced. Both price and value are a result of different input parameters. Price is determined by market factors like news, overall perception of the company, trading. In the short term the price is a reflection of the market sentiment. While value is determined by the quality of the underlying asset. How the business is making money and what it’s prospects are in the future. In the long term, the market behaves like a weighing machine, reflective of the overall performance of the underlying asset. In the short term, the market behaves like a voting machine.
In an ideal world, these systems won’t be mixed. But in reality there are a few cases where they influence each other. Share buybacks and issuing new shares can have effects on the price and value. In both cases the supply of shares are being altered which can directly affect the price. From a value point of view, either of these operations are reflective of the quality of the business. If a company is buying it’s shares back, it can be seen as a technique to prop it’s prices up. If the company is issuing new shares, that can have direct impact on the debt it has and increase the overall cash in the company. Making it more valuable.
A bad bank is a bank that is set up to hold risky, problematic holdings of a banks. By doing so, the actual bank can clear them off their books. The transfer of assets take place at market price. Bad banks is a simple idea of moving away that bad parts of the portfolio into another one, so that it doesn’t contaminate the rest. Allowing the bank to focus on it’s core activity of lending. The creation of a bad bank can be done even if there are no problematic assets, but if the bank wants to shift it’s core strategy.
This is a good way of reducing the risk of the depositors. But investors will still lose their money. By separating out the risky parts of the assets, it enables investors to better gauge the health of the company. Usually improving it’s overall outlook and making it easier to raise money in the future.
From a systems point of view this make more sense. Divide and conquer. The manager of the bad bank can then focus on managing the risky assets. This gives more room for investment practice as they are not tied to non-risky assets. The time horizon and risk profile are quite different for different underlying assets.
Over speculation of property assets and the exchange rate of the Swedish Krona led to a major banking crisis in Sweden. By 1992, 3 major banks were insolvent. McKinsey & Company were bought in to solve the situation. They proposed two bad banks that moved the toxic assets of the remaining banks at market price. The government in the end had to bailout at a price reportedly about 2% of the GDP. However, it was a backstop measure for this turning into a larger catastrophe.
After the 2008 financial crisis, this idea gained more popularity. It was seen as a method to handle such crisis without leading large financial institutions to insolvency. Recently the Indian union budget proposed to set up a bad bank to clean-up the bad assets in the financial system.
Green Bonds are used to raise money for environment and climate related projects. The financial instrument makes use of the debt capital markets to fund green initiatives. Governments and corporates are issuing green bonds to bring in capital. The World Bank is a major issuer of green bonds. As per a report from PwC, it is expected that 2021 will see the largest ever issuance of green bonds.
Green bonds are issued according to directives set by the Climate Bonds Initiative (CBI). The CBI is an international investor-focused not for profit organization that has set the certification and assurance standards for green bonds. This helps assure investors that the proceeds are being used for the right projects.
Could this system be built over a decentralized platform. There are 2 parts to this system. The part where money is raised based on a renting activity. And the second part, where the money is used to fund projects that help the environment. A blockchain could help bring access to a larger market for raising capital. Anyone could chip in to such an initiative. The blockchain would inherently secure the transaction and keep track of where the money is routed to.
Dapp is an app built on decentralized technology. Typical apps are built by organizations or single entities even if they are open-source. Dapps don’t have owners and are free from censorships. The app itself runs on a decentralized network making it almost impossible to take it down. Blockchain being the most popular of these kind of decentralized chains is a catalyst for such apps.
The application logic lives on the blockchain and would execute the same way irrespective of the environment. This gives dapps a more deterministic way of working. Dapps offer privacy to developers and is resistant to censorships. However, they are computationally a nightmare. To be efficient every node in the chain would have to execute it. It will be hard to maintain such an app and develop coherent user experiences where it is spread across multiple nodes.
Coinbase has launched an app store of sorts for dapps. Brave, a web browser, has built a web browser that focuses on privacy and information control. Instead of relying on the traditional advertising model, it uses consumer attention as it’s form of “currency”. Users can earn their attention token by using their web browser. Compound is an automated interest rate protocol that can be used to develop financial dapps. Compound is a platform that allows you to lend out your crypto assets and borrowers to borrow a loan against a collateral. The blockchain ensure the security of the lending activity itself.