Coffee can Filters:

1. Mkt cap>100 Cr
2. Sales YoY growth of 10% over last 10 years (in line with nominal GDP growth)
3. RoCE >15%; 15 – Risk free rate (8%) + equity risk premium (6.5%-7%); Equity risk premium -
Credit Risk of country (2.5%) + equity risk premium of US (4%)
4. For financial services ROE is taken 15% and loan growth of 15%
5. Firms that do make it to the Coffee Can Portfolios enjoy sustainable competitive advantages
over their competitors and reflect this in their share price performance. Specifically, the
franchises which featured most often in Coffee Can Portfolios tend to have three common
characteristics: a) obsessive focus on the core franchise instead of being distracted by short-
term gambles outside the core segment; b) relentless deepening of competitive moats and; c)
sensible capital allocation
6. Avoiding companies that borrow lots of money to grow
7. Prefer companies with intangible strategic assets: Surplus cash, Good REAL estate loc etc.
8. Refer Exhibit 71 and 72, for the manager’s own designed, critical factor(greatness factor)

Important Point:

1. Munger said that the returns generated by any company’s share price in the long term cannot
be significantly more than the return on capital employed generated by the company in its day-
to-day business. He explained this with an example, ‘If the business earns 6 per cent on capital
over forty years and you hold it for those forty years, you’re not going to make much different
than a six percent return—even if you originally buy it at a huge discount. Conversely, if a
business earns 18 per cent on capital over twenty or thirty years, even if you pay an expensive
looking price, you’ll end up with one hell of a result.’
2. Earnings is the biggest driver of stock market returns in the long run
3. ‘earnings growth’ can be achieved either by growing capital employed whilst maintaining ROCE,
or by growing ROCE through enhanced operating efficiencies whilst maintaining the firm’s
capital employed.
4. Page’s share price has compounded at 45 per cent per annum over the past decade (July 2007–
July 2017). More importantly, although the stock’s trailing P/E multiple re-rated from 27 times in
2007 to 70 times in 2017 (a CAGR of 10 per cent in the P/E multiple), the firm has delivered 32
per cent earnings CAGR over this decade. Hence, almost 80 per cent of Page’s share price
performance can be attributed to its earnings growth and only the balance 20 per cent to P/E
multiple re-rating
5. The power of compounding acting on a Portfolio, how a few stocks with high CAGR can still
maintain good portfolio returns. (Pg-67 of pdf)
6. Given the way price multiples have expanded for high-quality companies over the last decade,
should investors be concerned about the sustainability of stock returns from such companies if
they buy at current levels? Our answer is a resounding NO- Because The lack of correlation
between starting-period valuations and long-term holding period returns seems to be specific to
India (though study done by Fama is opposite that needs to be looked in how it was done and if
only linear association was considered)
7. Over the past seventeen years, Coffee Can philosophy has seen an average of 75 per cent
allocation to sectors like consumption
8. Structural Stocks outperform Cyclical
9. Coffee Can Portfolio constructed today needs to be invested equally in all the stock. This
portfolio should be left untouched for the next ten years regardless of how well or badly it does
in a short-term period within this ten-year holding period.
10. Check fund expenses they can compound too
11. the outperformance of large-cap equity mutual funds as an asset class more or less vanished,
but there is randomness even in the relative performance of mutual funds. The inconsistency in
the mutual funds’ relative performance also shows us why the past performance of a fund does
not indicate future outperformance(Wonderful explaination in CH-3)
12. Tax on Debt Mutual Funds is far lower than FD returns

Why not to invest in Real estate:

1. Illiquid Asset Class

2. Merky Sector
3. Myths like Prices only go up, since there are no cycles of 3-yr or 10 -yr as in equity and no indices
to track
4. Lure of leverage- Leverage generated by taking a Mortgage, If Increase in price is lower than
Interest on Mortgage, it is a loss making deal
5. Absolute returns versus compounded returns: Most investors look at absolute return of
investment going up in multiples over a span of period, not considering Annulaized
Compounded returns.
6. Developed Markets Like US have recorded data on Real Estate Vs Stock Markets, which indicate
Stock Market has clearly outperformed Real Estate.
7. real estate has time and again gone through boom-bust cycles across the world. Unfortunately,
because these cycles are long, investors tend to forget the previous bust when they are in the
middle of a boom, and the length of these cycles (alongside poor data availability in an emerging
market like India) prevents them from developing a deeper understanding of this tricky asset
class
8. in India the average probability of a sector leader (defined as companies that featured in the top
quartile on Ambit Capital’s ‘greatness framework’ in their respective sectors) remaining a sector
leader five years later is only 15 per cent. 5 That implies that 85 per cent of BSE 500 companies
slide towards mediocrity within five years of achieving greatness. In fact, the average probability
of a ‘great’ company actually becoming a sector laggard five years later is 25 per cent.
9. the probability of a company having significant accounting issues increases as the market cap of
the company decreases
10. in a small-cap portfolio, an investor is advised to pick up a larger number of stocks. This does not
mean that he/she should pick up low-quality stocks; it just means that there will be some stocks
which will be multi-baggers and yet some which will fail to deliver on their promise

When Small Caps do better:

1. in periods when credit availability is plentiful, economic growth is accelerating, and there are
ample undervalued competitors (listed or unlisted) that can be acquired. When M&A take place
 at reasonable valuations and with the aim of taking synergy benefits, they are share price
accretive
2. High valuations and forays into totally different business lines destroy value. Conversely, small-
caps tend to underperform when these conditions are reversed.

When the don’t:

1. High valuations and forays into totally different business lines destroy value. Conversely, small-
caps tend to underperform when these conditions are reversed.

Investment in Real Estate:

1. To go for Real estate Private equity fund. Since it is an equity investment, the investor gets full
participation in the SPV’s/Fund’s profits. However, the flip side is that the equity investor has to
bear the downside as well. While prices usually don’t crash, projects typically get delayed. This
increase in the duration of the project means that the equity investor’s return plummets
2. Ideally invest in secured NCDs of such projects, which offer highest returns, but downside is
heavy taxation
3. To diversify portfolio with Equity and Real Estate, correlation should be checked in, lower
number is more desirable(-1 to ~0), but from US markets it is observed number is 0.78
4. Commercial Vs Residential: For businesses, it is imperative to make profits and if the cost of a
particular building or location is too high, they will consider moving to some other building or
location. This rational frame of mind is very different to the mindset of the residential real
estate investor who invests in an overvalued asset and still expects future price appreciation
(irrespective of the current cost of the property). These contrasting mental frameworks have
created a remarkable anomaly in the Indian real estate market
5. Invest through InVITs and REITs

Fallacies:

1. P(Positive Rtn in one day) = 51.2%, 1year = 70% and almost 100% in 10 years, this is basis
assumption of log normal distribution of returns on parameters of Sensex only taking it’s mean
and Std. deviation, and generalized for the entire portfolio.
2. Back testing is done and shown only for July of every month
3. Myopic vision towards loss is suggested as major reason behind assuming Equity to be a loss
making investment. For this 1-yr hold strategy is recommended basis a Paper by Richard Thaler,
this is under assumption of Log normality of returns and only for BSE Sensex, not an individual
Stock
4. The book mentions long-term capital gains tax on all equity investments to be zero, this rule was
changed in FY-18 budget with introduction of 10% LTCG

Final Takeaway:

1. Allocate Funds to Equity + Debt, depending on risk appetite, which can be looked at considering
Years of earning ahead, Financial goal and obligations, For Debt consider Debt MF and in Equity
divide it among Large Cap, Multi Cap, and Small Cap.
2. Take a close look at the expenses before selecting final portfolio
 3. Large Cap MF may not beat Index Funds such as NIFTY 50 in long term so it is essential to invest
in Small Cap and Mid Cap too
4. Try to hold for Long with minimum Churn

Futher Study:

1. No fixed quantitative approach for weight allocation is given

2. Choosing Multi Cap and Small Cap MFs
3. Identifying exit point from a portfolio in a Bear run, this can be done identifying Cyclicity and
time Lag between Dips of BSE Small Cap and Large Cap