Secrets of the “Coffee Can” Portfolio

April 23, 2013

  • How to invest stress-free for the next 10 years: The “coffee can portfolio,” explained
  • Frank Trotter with a chart that signals a new gold rally
  • The virtues of “being early”: Rick Rule on the state of the junior resource market
  • Bacteria don’t stand a chance, even the antibiotic-resistant types: Patrick Cox on a solution to a $30 billion problem
  • The latest existential crisis of the French… the precedent set in Boston… reader takes us to task for “coma-inducing” (even worse than “long-winded”!) presentations… and more!

  “You won’t find an easier or more effective way to manage your stocks than this,” Chris Mayer promised.

Our ears perked up. Chris can wax enthusiastic about a favorite stock, for sure. But we’re hard-pressed to recall him making a sweeping pronouncement about managing your own portfolio.

And what a welcome time to hear it. If you’re edgy about “stocks near all-time highs,” wouldn’t you like to hear about a strategy that, if not bulletproof, is well armored?

  The concept goes back to 1984. Morning in America. Ghostbusters. “Karma Chameleon.”

And in a periodical with the stirring name The Journal of Portfolio Management, a portfolio manager named Robert Kirby laid out something called “the coffee can portfolio.”

“The coffee can portfolio concept harkens back to the Old West,” wrote Kirby, “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.”

100  “The idea is simple enough,” Chris explains: “You find the best stocks you can and let them sit for 10 years.

“You incur practically no costs with such a portfolio. And it is certainly easy to manage. The biggest benefit, though, is a bit more subtle and meaningful. It works because it keeps your worst instincts from hurting you.”

The idea took root in Kirby’s mind way back in the 1950s. He had a client he’d worked with for 10 years whose husband died suddenly. She inherited his stock portfolio, which she moved to Kirby’s care. The husband had managed his own investments.

“I was amused to find,” Kirby wrote, “that he had been secretly piggybacking our recommendations for his wife’s portfolio. Then I looked at the size 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.

Were there some losses? Sure. But several of those positions had grown from $5,000 to $100,000. And one had grown to $800,000 — more than his wife’s entire portfolio. “[It] came from a small commitment in a company called Haloid,” Kirby explained. “This later turned out to be a zillion shares of Xerox.”

  “That is an inspiring tale,” says Chris, “a triumph of lethargy and sloth.

“It shows clearly how the coffee can portfolio is designed to protect you against yourself — the obsession with checking stock prices, the frenetic buying and selling, the hand-wringing over the economy and bad news. It forces you to extend your time horizon. You don’t put anything in your coffee can that you don’t think is a good 10-year bet.”

Of course, you’re welcome to obsessively check stock prices — you don’t even have to wait for the morning paper the way you did in 1984. And you’re free to fret over every bad headline that comes your way. Here too, the Internet makes it possible to do it all day long, rather than wait for the six o’clock news.

Or… you could buy, say, five stocks and sock ’em away for the next 10 years. Chris has compiled a list for you. We pressed him to come up with as many as he could. Five was all he could come up with that met his stringent standards. For the particulars of this unique “lazy man’s route to riches,” take a look here.

  Stocks are zooming up this morning for no obvious reason. All the major indexes are up about 1%. The Dow has crested 14,700.

Today’s the day we get the “flash PMI” numbers from around the world — an early read on the strength of manufacturing so far this month. With all of these numbers, 50 marks the dividing line between expansion and contraction.

  • China: Down from 51.6 last month to 50.5 this month
  • Eurozone: Unchanged at 46.5. Even German output is shrinking now
  • United States: Down sharply from 54.9 to 52.0.

The Chinese and U.S. numbers came in “below expectations.” But new home sales in the U.S. rang in close to the consensus guess — up 1.5% in March, to the highest level since autumn 2008.

Apple reports first-quarter earnings after the close. As of last week, it is no longer the largest company in the world; its market cap has cratered enough that Exxon Mobil has reclaimed the crown.

  Gold is losing ground this morning, but still holding the line on $1,400. At last check, the spot price was $1,407.

Goldman Sachs claims to have covered its short position in the Midas metal for a 10.4% gain. “The move since initiation was surprisingly rapid,” says its research note, “likely exacerbated by the break of well-flagged technical support levels.” Mission accomplished.

Silver, meanwhile, is getting beaten to a bloody pulp. At $22.84 this morning, it’s back to autumn 2010 levels.

  “Gold lately has had about as much luster as a rusty tin can,” wrote Time magazine — in August 1976.

“After that article was published,” EverBank’s Frank Trotter reminds us, “the yellow metal rallied about 600% in the following four years. I tell you this story because investors’ sentiment toward precious metals is also terrible today.”

Look no further, says Frank, than the Hulbert Gold Newsletter Sentiment Index. “It’s a survey that shows what gold newsletter writers are telling their subscribers. Right now the index is showing a reading of 31% net short, a historical record low since the inception of the survey in 1997. This means the average gold newsletter adviser is recommending that clients and subscribers short gold with 31% of their portfolio.

“Since 2000,” Mr. Trotter continues, “this index has registered a reading below 20% only three other times. The chart below shows the performance of gold since 2002 and the readings of the index. As you can see, gold had a huge rally on all three of those occasions.

“There’s no question that sentiment couldn’t be worse toward gold than it is now,” Frank sums up. “And that’s a good sign.”

  “The narrative hasn’t changed since 2006,” says Sprott USA’s Rick Rule of the natural resources market — especially the “juniors” that are his specialty.

“All the factors that were in place for a secular bull market in resources are intact,” he tells Canadian finance blogger Tommy Humphreys. “The very best assets in the junior natural resource sector are on sale for up to 70% off. Investors have to understand that the down cycle can go on for four-five years, but in my experience, being early is enormously preferable to being late.

“It’ll feel like we’re in a bear market for another two years,” he warns. “But the money that can be made when goods are on sale in volatile markets is extraordinary if one doesn’t buy the sector, but buys individual issues which are irrationally priced down.”

Both Rick and Frank Trotter are among our regulars at the annual Agora Financial Investment Symposium in Vancouver. We’re pleased to announce a new face this year — Currency Wars author James Rickards has just confirmed for our event. Early registration discounts are still available… but not for much longer. After all, the event starts three months from today.

  “Even with the advances in germ-killing technology we’ve enjoyed over the past 100 years,” writes Patrick Cox, “bacterial infection is still a health care problem.”

One in 20 hospital patients will contract an infection, according to the Centers for Disease Control — costing $30 billion every year. “With emerging antibiotic-resistant bacteria, the problem will only worsen,” Patrick warns. “Overuse and abuse of antibiotics, including extensive use as part of animal feed, is creating a whole new class of superbugs.”

Enter a small molecule much like the active ingredient in chlorine bleach — hypochlorous acid. Scientists have known about it for decades, but it hasn’t proven useful. It decomposes too quickly into other molecules to be effective.

Until now. A tiny company on Patrick’s radar has figured out how to keep hypochlorous acid stable for two years. In peer-reviewed studies, this formulation killed bacteria in seconds. “Even tough bacterial spores were killed in a couple of minutes,” Patrick says. “Hypochlorous acid also kills fungi, yeast and viruses in a similar period of time. This is true even for microorganisms resistant to chlorine-based bleaches.” And unlike bleach, it’s nontoxic.

The potential uses are many: treating wounds, treating allergic reactions, even reducing post-surgical scars.

[Ed. note: The company described here is the most recent recommendation in Patrick’s premium advisory, Breakthrough Technology Alert. For three more days, you can take advantage of a substantially discounted subscription rate… and you’ll receive a special report on a tiny company that’s managed to snag a massive government-granted monopoly.]

  We had no idea it was so tough in France these days: With unemployment at a 16-year high, it appears the French are more miserable than Henri, the existential cat.

“A new survey,” according to the European news site The Local, “found that 70% of them see their country as afflicted by a ‘collective depression,’ with two-thirds believing that France is ‘in decline.'”

“Collective depression”? The people who constructed the survey actually used that expression? Only in France…

“Perhaps even more strikingly,” the article adds, “pessimism about the long-term performance of the French economy has shot up, from 64% in 2010 to 87%” in the current survey.

“I don’t get any on-the-ground sense of this collective depression,” writes one of our contacts in France who passed along the story for your amusement. “People here generally seem to hum along at their own level with their own individualized concerns, rather than anything all that collective.”

Which seems to say more about the pollsters than the French…

  “I don’t know about you guys,” a reader writes, “but I watched the live ‘news’ feed on NBC most of the day of the bombing.

“I am VERY skeptical of all the BS that is being put out about the ‘bombers’ and the ‘capture.’ I think something BIG is brewing in Washington and all this is a prelude to confuse the man in the street and then reinforce the patriotic brouhaha that will follow with some new venture across the pond. Holding my breath!”

The 5: Hmmm…

“The sight of a city placed under martial law — its citizens under house arrest (officials used the Orwellian phrase ‘shelter in place’ to describe the mandatory lockdown), military-style helicopters equipped with thermal imaging devices buzzing the skies, tanks and armored vehicles on the streets and snipers perched on rooftops, while thousands of black-garbed police swarmed the streets and SWAT teams carried out house-to-house searches in search of two young and seemingly unlikely bombing suspects — leaves us in a growing state of unease.”

We’ll forgive John Whitehead of the Rutherford Institute for the long sentence. “These are no longer warning signs of a steadily encroaching police state,” he adds more eloquently. “The police state has arrived.”

What happened if you didn’t immediately obey orders to stop looking out the window…

“As more people view photos like the above,” writes journalist and author James Bovard, “the knee-jerk pro-government reaction to last week’s finale will dissipate. It will not matter if 70% or 80% of people still support any action the government takes. There will be enough people — initially with camcoms and cell phones — that the legitimacy of mass crackdowns will not survive.”

We can only hope…

  “I enjoy my subscription to Outstanding Investments,” a reader writes. “There may even be a time when I might also be interested in subscribing to other services.

[Here comes the inevitable “but”…]

“However, I am doubtful that this will ever happen, as if your readers make the mistake of clicking on one of your come-ons, they are held hostage for about a half hour of what is largely a Ron Popeil production where you tell us over and over how wonderful everything is with products that do everything but make julienne fries, yet you withhold the subscription price until the end of the coma-inducing ad. It just screams sleeeeeeeaze.

“I am sure that I speak for many, many of your subscribers when I assure you that we no longer even bother to listen to 90% of what you offer. I can assure you that you would be far more successful if you had the integrity to get to the point, tell the price and then list all of the positives without it being a production of War and Peace. Unfortunately, your sleazy marketing technique detracts from what may be otherwise worthwhile product offerings.”

The 5: You mean, like this? Or this? Or even this? (Which we hasten to point out will be removed from the Internet at midnight Thursday night.)

Yeah, nobody can stand those. We prefer to annoy our customers and drive them away. Why, at the rate things are going, it’s a wonder we can even pay the light bill…


Dave Gonigam
The 5 Min. Forecast

P.S. So things are still a little squirrelly around the office. I pinned down Addison just long enough for him to confirm major changes are on the way to our flagship daily e-letter, The Daily Reckoning. But that’s all I could get out of him he had after a lunch meeting with Bill Bonner yesterday.

In the meantime, he asked me to direct your attention to a survey. It’s super-simple and won’t take more than a minute or two of your time. It asks the following question:

“What do you believe is the biggest threat to your financial security right now?”

It doesn’t cost a thing to take part in the survey. Addison made me promise to send along the results within 24 hours. So please, tell us what’s on your mind.


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