My Ghost Ship Pension Portfolio – Coffee Can SIPP


In early 2017, I moved an old pension scheme from an underperforming high fee company to a platform where I could invest the money myself. The idea was that I would be able to outperform the high fee company by producing superior returns and letting my money compound at higher rates in order to have a higher pension value when I retire.

 

Since the move, I have been patiently buying up high quality companies. I can happily say that this past week I was able to deploy the full amount of money I was transferred. Yes it has taken me two and a half years to do this! There is a reason for this. I only wanted to invest in the highest quality companies at attractive valuations so that I am able to compound my money at attractive rates over time.

 

I want to treat this as a buy and forget portfolio. I want it to be purely passive. I want it to be a low time consuming pension that I check up on once a year. Ideally I would check up on it in 30 years time when I reach the age of 55.

 

To understand why I am taking this approach of setting up a kind of Ghost Ship Portfolio that, once it has set sail, will drift almost untouched for the next 30+ years, we need to look at the idea behind the original coffee can portfolio.

 

Coffee Can Investing – Extreme Buy & Hold Investing

Robert Kirby derived the idea behind the Coffee Can Portfolio in a paper he wrote in 1984 for the Journal of Portfolio Management.

 

It is a very compelling read and if you have the time you should read it.

 

As Kirby explains “The coffee can portfolio concept harkens back to the Old West, when people put their valuable possessions in a coffee can and kept it under the mattress. The success of the program depended entirely on the wisdom and foresight used to select the objects to be placed in the coffee can to begin with.”

 

In the same  paper, Kirby told a funny story about how his idea came about:

 

“The potential impact of this process was brought home to me dramatically as the result of an experience with one woman client. Her husband, a lawyer, handled her financial affairs and was our primary contact. I had worked with the client for about ten years, when her husband suddenly died. She inherited his estate and called us to say that she would be adding his securities to the portfolio under our management.”

 

“When we received the list of assets, I was amused to find that he had secretly been piggybacking our recommendations for his wife‘s portfolio. Then, when I looked at the total value of the estate, I was also shocked.”

 

“The husband had applied a small twist of his own to our advice: He paid no attention whatsoever to the sale recommendations. He simply put about $5,000 in every purchase recommendation. Then he would toss the certificate in his safe-deposit box and forget it.”

 

“Needless to say, he had an odd-looking portfolio. He owned a number of small holdings with values of less than $2,000. He had several large holdings with values in excess of $100,000. There was one jumbo holding worth over $800,000 that exceeded the total value of his wife’s portfolio…”

 

That is an inspiring tale, a triumph of lethargy and sloth.

 

Another example of a real life coffee can portfolio is the Voya Corporate Leaders Trust Fund. 

 

The fund has not bought a new share for 80 years! Yes that is eighty years! 8-0!

 

The Voya Corporate Leaders Trust Fund, now run by a unit of Voya Financial Inc bought equal amounts of stock in 30 major US corporations in 1935 and hasn’t picked a new stock since.

 

There are only 21 names left. Some companies went bankrupt, some got acquired whilst others merged with other companies. Even with the bankruptcies, the fund vastly outperformed due to riding out its winners.

 

So how has it done? The Voya Corporate Leaders Trust Fund has beaten 98% of its peers!

 

According to a Reuters report, “over the five year period ended Feb. 24 [2015] the fund returned an average of 17.32 percent a year, including fees, 1.03 percentage point better than the S&P 500, said Morningstar. For the 10 years ended Feb. 24 the fund returned an average of 9.40 percent a year, including fees, 1.32 percentage point better than the S&P 500.”



Why The Coffee Can Portfolio Approach Works

The coffee-can portfolio is designed to protect an investor against his worst enemy, himself  – the obsession with checking stock prices, the frenetic buying and selling, the hand-wringing over the economy and bad news. It forces one to extend their time horizon. The investor gets to benefit from the time horizon arbitrage . It forces the investor to have absolute conviction in their picks by only buying into companies they thing will do well over the long term.

 

Another huge advantage is the low cost. After the initial dealing commission expenses, there should be practically no expenses going forward except for the occasional reorganisation fee e.g., someone buys out one of the stocks for cash and the broker assesses a nominal service charge to facilitate the exchange. (One of my stocks looks likely to be taken over already!)

 

This low cost approach should not be underestimated. Fees are a huge drag on performance.

 

The low turnover bit helps too. Just go and look at the best performing funds today. You will not be surprised that low turnover fund houses, such as Fundsmith and Lindsell Train, top the list. So why is this? In my opinion, lower turnovers imply higher conviction. If you know what you own and why you bought it , then if it falls in price, you are not likely to panic and sell. People on panic when they don’t understand what they own and have no conviction in the idea.

 

The coffee can approach also allows one to ride their winners.

 

Investors tend to sell their winners too soon. If a stock goes up 40%, people are quick to want to take a profit. But great companies are hard to find. You might take that profit and put it in a value destructive business and boom, you are back to square one. It is better to stay invested in good companies. Good companies consistently create value over time which allows an investor to compound their money over the long hall without much effort.

 

My Buy And Hold Forever Portfolio

This is the part you have all been waiting. The part where I reveal which stocks I am happy to hold over the next 30 years. The main criteria here was the quality, durability and future growth prospects of a business.

 

The valuation should have been  least of my concerns as the beginning overvaluation will almost assuredly be a rounding error by the end of a 30 year period. Yet I can’t shake off my spots as a value investor. Yet I bought some highly valued stocks which ordinarily I would never do. Incidentally, the two most highly valued stocks, Mastercard and Paypal,  have been my best performers with both being up over 100% since my purchase.

 

Looking at recent history, I don’t remember seeing stock prices this high relative to cash flows for a long time (barring the dot com boom) .  Unless we enter bubble territory, I think we’re going to have to either tread water for a couple of years as the earnings catch up to the market quotations or, the more attractive alternative for long-term investors, experience a drop of 30% or 40%.  No one can predict which will happen. I am not worried about this. I am confident that the businesses I have invested in will provide me attractive rates of return over the long term.

 

The stocks I purchases and the prices I paid are as follows:

  • Becton Dickinson – $195
  • Colgate               – $63
  • Coty                   – $16
  • Facebook            – $130
  • General Mills       – $44
  • Grand Vision       – €19
  • Marlowe              – £3.20
  • Mastercard          – $115
  • Novo Nordisk       – 242 DKK
  • Optibiotix health  – £6.2
  • Paypal                – $39
  • Phillip Morris       – $87
  • Qualcomm          – $54
  • SDI                    – £3.6
  • Somero              – £2.60
  • Smucker (JM)      – $104
  • Unilever              – £38



The above are my 17 shares for the next 30 years.

 

If I didn’t have a bias against buying richly valued shares,  the portfolio would look slightly different. I would swap out Coty for a L’oreal, Mondelez or Pepsico (Although I hold the latter two in my ISA account). The cheap valuation of Coty lured me in (aaaargh!. Apart from this the management team at Coty lead by highly rated ex Reckitt Benckiser boss Bart Becht appealed to me. Coty also has high family ownership through the JAB holding stake. Family ownership usually signifies that ability has the freedom to plan for the long term instead of meeting quarterly numbers to please Wall Street.

 

Another company I would have loved to add to this portfolio is Visa (I do own it in my ISA account). The business is simply outstanding. But I already own one similar company in the form of Mastercard. And at this point in time I cannot differentiate the quality between Mastercard and Visa. Both are awesome. I also own another play on the transition to a cashless society, Paypal. Like Mastercard and Visa, PayPal is another outstanding business.  Even though the growth in these three companies is simply jaw dropping and they have a large runway fro growth, I do not want to be overly concentrated in this sector. That is the only reason I did not buy Visa. Otherwise I would buy it in a heartbeat.

 

One thing that pops out is that I purchased 6 consumer staple companies in the form of Colgate, Coty, General Mills, Phillip Morris, JM Smucker and Unilever. The idea with these companies is to invest in things that don’t offer a lot of change . Colgate has been around for 200 years and I am willing to bet that it will be around for 200 more. That is the type of company I want to own over the next 30 years. One that has resilience.

 

Furthermore, in a study conducted by Dr Jeremy Seigal to find the best performing stock between 1957 and 2003 , consumer staple stocks as a whole came out on top.  Many consumer staple stocks have dividend histories that go back decades, if not generations. As for the best performing individual stock?… Phillip Morris.

 

Talking about resilience and change, one sector you will not see much of above is technology. That is because of the frantic rate of change seen in this sector historically. Not many technology companies that existed 30 years ago are around today. I can’t lock my money into an industry with that history. But things are starting to change slowly. That is why I have bought facebook. I think it will be around for a long time. And I also think it is hugely under-monetised.  Read my previous post on Facebook to see what I think of the company.

 

Qualcomm is another such company due to its extensive patent portfolio. Did you know that Qualcomm gets a royalty for every phone sold?!

 

In terms of another favourable sector, healthcare, I have three stocks. They are Becton Dickinson, Grandvision and Optibiotix health. The world is only getting older and demand on healthcare will be greater. They are no pharmaceutical companies as they are too hit and miss. Essentially, most pharmaceuticals companies are betting that they will find the one blockbuster drug, which is getting harder and harder to do.

 

Marlowe, SDI and Somero are the three small caps. These are essentially the companies which I expect to have the highest growth going forward as there sales are starting from a smaller base. Whilst the bigger companies bring the consistency, these smaller companies will add the juice that will really fuel my returns.

Another important point to note is that 11 of the 17 companies are headquartered in the US. There are two reasons for this. The first is that the vast majority of the best companies in the world are found in the US. No wonder the S&P500 beats any other country index hands down. The second is that in a pension, as long as you have completed your W8-BEN form, there is a 0% dividend withholding tax on dividends from US companies. Ordinarily it would be 15% in any other account (with a w8-ben form). That is why it is a he plus to hold any US shares in a Pension (SIPP).

 

There you have it, my portfolio that is going to be locked away for the next 30 years. I expect to only touch this portfolio if a major event happens such as a takeover. Incidentally, Grandvision is currently in takeover talks so I might have to step in way sooner than I expected.

 

Apart from the little tinkering due to special situations, this particular portfolio is going to look similar to the research portfolios upon which the work of people like John Bogle and Jeremy Siegel is based when they call for long-term, low-cost, passive equity strategies only.

 

I have aimed to pick stable companies that earn above-average returns on capital, have strong balance sheets, have a long runway for growth and have a history of creating shareholder value.

 

This is me signing off this particular portfolio. See you in 30 years!

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