In the mountains of Ethiopia, around the year 850 CE, a goatherder named Kaldi went out in search of missing goats. When he located them, he observed them eating small red berries. He also noted the goats became energetic and would remain awake when they normally settled down for the evening.
Kaldi brought the berries to a local monastery where the abbot made a drink with the berries to see if they had the same effect on him. He discovered they in fact kept him alert during the hours of evening prayer when he would typically become sleepy. This product was eventually turned into coffee, which was stored in tins. After the coffee was gone, people inclined to saving their money would often fill the tins with loose change and dollar bills for a rainy day.
The investment strategy where you purchase high-quality stocks and then hold them over the long-term is affectionately called “coffee can investing.” This involves the practice of keeping coins or other valuables in a coffee can for a long period of time, waiting for a rainy day many years down the road. It can’t be stressed enough the importance of harnessing the power of time, often called the time-value of money.
How does coffee can investing work?
An investor regularly contributes money or buys a set number of high-quality stocks, often called “blue chip stocks,” which tend to be the biggest and strongest companies that maintain a competitive advantage over other companies and can survive unexpected fluctuations in the market. They then hold those stocks for an extended period of time. Historically, these stocks pay a dividend that investors can reinvest and allow the power of compounding to help generate wealth.
Remember, all investing involves risk and the potential for losing your money. All levels of investing are a form of gambling, however there are ways to invest that are lower in risk than others. Coffee can investing is a long-term approach that focuses on staying committed and being patient. Another name for it is value investing. Consider these five benefits of coffee can investing.
Selecting historically strong companies
A key to coffee can investing is selecting valuable and reliable companies that will hopefully be around for a while. Generally, most value investors focus on companies known as “blue chips.” These companies are typically listed on a major stock exchange, have a long track record of profitability, large market capitalization, a history of steady growth, and pay dividends. Even though blue chip companies are viewed as relatively low-risk investments, they are not immune to volatility and failure. The 2007-2008 financial collapse was such an instance. Some examples of blue-chip companies include:
- Coca-Cola
- Chevron
- McDonald’s
- Amgen
- Proctor & Gamble
Investing in companies that offer a dividend
An aspect of coffee can investing that investors look for are companies that pay a dividend. Each investor pursues their investment strategy for their own reasons. Some plan to live off their dividend income while others reinvest their dividends in the hopes that compounding will help to grow their wealth.
Harnessing the power of time
Coffee can investors who start investing early enough may be able to take advantage of what is known as compounding. Investors hold their stocks for decades, and interest is computed on the accumulated unpaid interest as well as the original principal. Compound interest doesn’t only occur with stocks. Other investments like exchange-traded funds and savings accounts also experience the benefits of compound interest.
Investing with future tax responsibilities in mind
Nobody knows what the future holds. Therefore, it may be beneficial to diversify your accounts based on tax treatment, especially if you aren’t sure what tax bracket you will be in down the road. Most of us don’t know. Instead of putting all your money into one account, value investors may consider allocating investment contributions between a 401(k), a tax-deferred IRA, and an after-tax Roth account.
Consulting your financial professional
Investing, even as a long-term coffee can or value investor, can be complex and stressful if you don’t have a strategy. To help mitigate some of the risks of investing while working to grow and preserve your wealth, consider consulting a financial professional today and turn your beans into bucks.
Important Disclosures:
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. Investing involves risks including the loss or principal. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy. "There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
Sources:
Blue Chip Meaning and Examples (investopedia.com)
This article was prepared by LPL Marketing Solutions
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