Picking a Stock for the Year 2048

In the book Coffee Can Investing, co-authored by Marcellus’ founders, we talk about the concept of buying high quality stocks (RoCE greater than cost of capital every year for atleast a decade) with high reinvestment rates and leaving them untouched for ten years and how such an approach delivered market beating returns. This approach looks to be dwarfed by a new student run fund which looks to buy stocks and leave them untouched for 25yrs. The initiative is funded by Tom Gayner, the highly respected investor and CEO of the insurance firm, Markel.

“By the year 2047, Mr. Gayner’s family will contribute, in 25 annual installments, a total of $750,000 to the two clubs.

The students—29 of them this year at Virginia, nine at Delaware State—will use that money to pick investments that will be frozen for the next 25 years. Each year, the members will buy another round of picks for the next quarter-century. No one, no matter what, will ever be able to sell anything.

Starting in year 26, the members who picked the stocks 25 years earlier will disburse half the accumulated money for scholarships; the other half will be reinvested for the future by that year’s members.”

Jason Zweig, the author of this piece puts the experiment in context:
“One lesson from these new clubs is old: the astonishing power of letting your winners run for as long as possible. You can’t lose more than 100% on even your biggest losers (unless you bought them with borrowed money), but the potential gains on your biggest winners are boundless.

From the beginning of 1993 through this Feb. 28, for instance, 58 stocks gained more than 10,000% apiece, according to the Center for Research in Security Prices. Ten returned more than 25,000%.

These “superstocks” include now-familiar giants Apple Inc., Qualcomm Inc. and Monster Beverage Corp.—but also such minnows as air-conditioning firm AAON Inc., tobacco-and-real-estate holding company Vector Group Ltd. and kitchen-equipment maker Middleby Corp.”

Zweig, then cites the incident that inspired the term ‘Coffee Can Investing’:
“In a 1984 article called “The Coffee Can Portfolio,” veteran investor Robert Kirby described a client’s husband, who had exactly copied all the buy recommendations Mr. Kirby’s firm had made to his wife, putting about $5,000 in each.

Unlike her, however, the husband had ignored all the sell recommendations. He’d never sold a share. Several of his holdings grew to more than $100,000 apiece. One, which became Xerox Corp., surpassed $800,000, greater than the value of his wife’s entire portfolio.

The long-term tailwind from letting your winners run is easy to underestimate; the human mind isn’t built to extrapolate giant growth rates over multidecade periods.”

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Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.