Ambit Capital’s Saurabh Mukherjea, Rakshit Ranjan and Pranab Uniyal must have been miffed with Finance Minister Arun Jaitley. A key assumption — zero tax on long-term equity gains — made by the trio in their book Coffee Can Investing: the Low Risk Road to Stupendous Wealth was upended by the Budget on February 1.

Long term capital gains on equity are now taxed at 10 per cent. The book, published in late February, does not reflect this important change that will alter quite a few calculations. Guess, it must have gone to the press before the Budget.

But this snafu that will hopefully be addressed in future editions does not take away from the key findings and usefulness of the book. Over eight chapters and through the stories of two individuals, it lays out well the pitfalls tripping most Indian investors — primarily over-investment in real estate, gold and fixed deposits, and under-investment in equities. And, it offers solutions to ‘grow your money four to five times whilst taking half the risk compared to the overall market’. This sounds like click-bait and counter-intuitive. After all, isn’t higher reward joined at the hip with higher risk? No, says the book, with examples showing that this need not always be the case.

The author’s prescription for high returns with low volatility is ‘Coffee Can Investing’, an idea introduced in 1984 by the late Robert Kirby of Capital, the Los Angeles-based investment giant. The term was inspired by the practice of Americans saving their valuables in a coffee can before banks became widespread in the country. It’s the classic ‘buy and forget’ approach — that in order to truly become rich, an investor has to let a sensibly constructed portfolio stay untouched for a long period of time. That is, invest in high-quality equity stocks and then sit tight for a long time without worrying about the stock price movements.

For their Coffee Can portfolios, the authors filter stocks with market capitalisation above ₹100 crore using twin filters — revenue growth of at least 10 per cent and return on capital employed of at least 15 per cent each year over the preceding ten years. For financial services stocks, the filters are changed to loan growth of at least 15 per cent and return on equity of 15 per cent. An equal-weighted portfolio of such stocks held for a decade with no churn generates substantially higher returns than the benchmark Sensex, say the authors using back-tested data.

First principles

The book also lays out many first principles of investing — setting objectives and having a financial plan, need for diversification, keeping investing costs low for superior returns, going for high-quality stocks and staying patient with them. It strongly advises keeping away from real estate as an investment citing the illiquidity, high transaction costs, sub-optimal taxation and poor returns of the asset class over long periods of time.

The book recommends choosing low-cost exchange traded funds (ETFs) for large-cap equity exposure. It argues that the shrinking outperformance of large-cap mutual funds does not justify their high expense ratios, making ETFs a better choice. But well-chosen small-cap stocks, it says, though riskier hold high scope for outperformance. This is because of their potential to grow profits much faster than large companies and their eventually being discovered by the stock market.

Here, it recommends paying for advice and going for direct plans of mutual funds to avoid distribution costs that eat into returns significantly over long time periods. It also recommends allocation to small- and mid-caps using the ‘Good and Clean’ proprietary model of Ambit that identifies stocks that have created great shareholder value and have good corporate governance and accounting practices.

 

While the chunk of the portfolio exposure is skewed towards equity, debt exposure at the tail-end is suggested via high-quality short-term debt mutual funds. The last chapter is also useful, telling readers how they can design their own financial plans using Ambit’s financial planning tool.

Overall, the book is well-researched, informative and thoughtfully structured. But there are chinks too.

First, the fact that past performance is not indicative of future returns could dent the effectiveness of Coffee Can portfolios. While the portfolios have outperformed on an overall basis, thanks to big winners such as Motherson Sumi, HDFC Bank, Asian Paints and Havells India, there are instances of stocks within the portfolios that slipped badly such as Roofit Industries, Alok Industries, Aftek and Tulip Telecom.

To be fair, this is a risk that the book points out too, but highlighting that the outperformance of the strong stocks more than offsets the poor show of the weak ones. Still, there is a risk that a Coffee Can portfolio could contain more duds than winners — holding on to such a portfolio for an extended time without churn could mess up one’s finances. This risk seems amplified especially with the massive technological disruptions under way that have felled many stalwarts in the past years. Next, an analysis of some key behavioural finance biases that propels investors towards suboptimal behaviour and the mechanisms to avoid these would have been helpful. The book also seems to restrict itself to advising the higher income category of investors. It would have been nice to have a more rounded perspective.

Finally, the plug at many places in the book for Ambit’s portfolio management service (PMS) is hard to miss. From the Coffee Can portfolio to the Good and Clean portfolio to the financial planning tool, an investor seeking to translate the advice into action would likely have to approach the authors’ organisation.

Nothing wrong about that; just that it jars beyond a point.

All said, the book is a good read that adds to investing knowledge and could help build a healthy, sustainable corpus.

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