As we take our hard-earned savings and choose investments, how often should we check on them? How often should we make changes? Even the most successful stocks endure significant periods of decline along their journey — moments that cause investors to question their thesis and consider selling. So how do we avoid selling during difficult times? And perhaps even more importantly, how do we avoid selling during the good times?
There’s an old story I heard recently of a person who bought stock certificates and placed them in a coffee can. Every time a new stock was purchased it would be deposited into the coffee can, which was then promptly tucked away, out of sight out of mind. Simply put, a coffee can investor is someone who buys and never sells, the ultimate “buy and hold.”
And what happens to a bundle of stocks that have gone undisturbed in a coffee can for 50 years? For this investor, some were cut in half, others doubled, but the investor also found that some of the certificates went up by 50X or even 100X. The value of the coffee can’s holdings was significant.
The key takeaway is that many of the best-performing stocks in history experienced extreme drawdowns along the way, often down -50%, -70%, or even -90%, possibly multiple times. At the same time, being up 5X, might prompt an investor to sell and miss out on the extraordinary upside that is still to come.
There are certainly times when selling proves wise — Cisco in 2000 is one of the clearest examples that comes to mind. Investors who sold near the peak did very well, while more than 25 years later, the non-sellers are still waiting to reach those highs again. But the beauty of the “coffee can” strategy is that it doesn’t require you to perfectly identify those moments. Over time, the biggest winners naturally grow into a larger percentage of the portfolio, while weaker holdings shrink into relative insignificance. The exceptional performers end up overwhelming the mediocre and failed investments. JL Collins refers to this as “self-cleansing,” the winners increasingly carry the results while the losers matter less and less.
Tweaks and maintenance are important, but they should be viewed through a long-term lens of 5–10+ years. Companies are constantly reinventing themselves to stay relevant in a rapidly changing world. If the market is down 10–15%, the average intra-year decline in any given year, does that alone justify selling? Conversely, does the market reaching an all-time high justify doing so? The coffee can investor remains steady through both scenarios, understanding that short-term fluctuations to the downside and upside are normal and frequent. Historically, patient, long-term investing has at times been associated with positive outcomes.
Source: Neeraj Khemlani. The Coffee Can Investor.
Past performance is not indicative of future results, and investment outcomes will vary.