13
Jul
2020

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The coffee can approach

The coffee can investment approach is an important concept that illustrates a key factor in how we view prospective businesses. It was coined by famed advisor Robert Kirby, who discovered that one of his clients had been selectively acting on all his buy recommendations, putting away the stock certificates and ignoring any sell recommendations. After a few years, despite some unsuccessful investments in his portfolio, he had performed far better than Kirby himself.

The key reason for his client’s success was that he never sold his winners. Xerox went up 160 times in the period and was worth more than the entire identical portfolio that followed all of Kirby’s advice. As John Huber noted, “The vast majority of losses come from picking the wrong business, not picking the wrong valuation on the right business.” In the long-term, allowing the world’s best businesses to continue compounding your wealth has proven to be a most effective strategy.

The important takeaway is that we invest in businesses we are confident we could forget about for five or more years and be sure their earnings power will remain at least as strong as it is today. This kind of time horizon prevents overweighting of information that may appear significant but truly only affects what the next six to twelve months might look like. Of course, we still believe it is important to be on top of new information (fundamentally you must know to change tact and sell early when you are wrong), albeit with a strong filter.

One of the best things about great businesses, especially the ones leading the world today, is their ability to grow into bigger and even better businesses than analysts are capable of forecasting. Amazon has appeared expensive for the better part of twenty years yet continues to make strategic investments that ultimately turn into new and powerful revenue streams. Beginning as an online bookseller, Amazon has since become the online commerce leader, driven by Prime and Fulfillment by Amazon. Meanwhile, they have also become the largest cloud computing provider in the world. With greater scale comes greater access to data, which Amazon utilises to target these new business ventures effectively. Despite compounding at over 30 per cent in the decade from January 2010 to January 2020, the stock has nearly doubled from its mid-pandemic low this year.

The coffee can investing approach operates akin to Warren Buffett’s 20-ticket punch card rule, whereby you view each investment decision as one of twenty you get in your lifetime. This attitude is exactly why Berkshire Hathaway has operated as an ideal coffee can for so many decades – businesses are bought but very rarely sold. Buffett understands the power of compounding and the importance of taking big swings when you are certain you have found one of your best ideas, as they are exceptionally rare.

Although the coffee can principle appears simple, in practice it is almost never followed. New information is endless and investors are emotional. It is nearly impossible to act purely on a view of the world years in the future, especially in a crisis when under the most near-term pressure. Humanity is such that we always want to act. Our approach at Montaka involves owning the long-term winners in attractive markets, while they remain undervalued. Our goal of maximising the multi-decade compounding of our clients’ wealth (alongside our own) guides our decisions to be based on the probability of outcomes years from now and keeps us from acting irrationally to temporary concerns.

The Montgomery Global Funds and Montaka own shares in Amazon and Berkshire Hathaway. This article was prepared 13 July with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade these companies you should seek financial advice.

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The Montgomery Fund

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Our Funds

Concentrated High Conviction Equities

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Montgomery Global Equities Fund (ASX:MOGL)

Global
Available on the ASX as an Exchange Traded Managed Fund, invests in 15 to 30 quality global businesses for long-term capital growth with a target distribution yield of 4.5% per annum. Mirrors the strategy of the Montgomery Global Fund.
Unlisted From $25,000

Montgomery Global Fund

Global
Invests in 15 to 30 quality global businesses for long-term capital growth. Priced daily. Mirrors the strategy of the Montgomery Global Equities Fund (ASX:MOGL).
Unlisted from $25,000

The Montgomery Fund

Australia/NZ
Aims to provide long-term growth and income by investing in 20 to 40 high-quality Australian and New Zealand businesses trading at attractive valuations. Priced daily.
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Montgomery Small Companies Fund

Australia/NZ
Aims to provide long-term growth by investing in 30 to 50 high quality, undervalued, Australian and NZ small and emerging companies with strong growth potential. Priced daily.
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The Montgomery [Private] Fund

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Seeks to deliver absolute returns from a portfolio of high-quality Australian and New Zealand businesses. Capital preservation is paramount. By invitation only.

Alternate Equity Strategies

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Montaka Global Access Fund

Global
Aims to generate materially higher risk-adjusted returns, net of fees, than is generally available in the equities market over the medium term. Priced monthly. Provides retail investors access to the Montaka Global Fund.
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Montaka Global 130/30 Fund

Global
Provides the opportunity to benefit from both the gains of extraordinary businesses and the declines of deteriorating businesses through a global equity active extension strategy, which has the potential to significantly outperform the broader equities market over time. Seeks to generate double-digit annual average returns, net of fees. Daily priced.
Unlisted From $1 Million

Montaka Global Fund

Global
Aims to generate materially higher risk-adjusted returns, net of fees, than is generally available in the equities market over the medium term. By invitation only.