Coffee Can Investing Book Summary
Note: This summary is made up of my notes, thoughts and highlights of important passages while reading the book. I keep updating the summary when I revisit it, and occasionally may edit it to reduce summary length. Don’t be surprised if it has changed between visits. The author’s words are in normal font, while my interpretations are in italics.
Introduction
‘Risk comes from not knowing what you are doing.’ —Warren Buffett
If you listen closely to what the RM [relationship manager of your bank] is saying, you will find that little of it is genuine advice; most of it is promotional literature disguised as financial advice.
A diligent investor seeks to avoid getting trapped in such mis-selling by reading up on his own.
The relevance of global literature to India becomes limited because of a combination of three factors.
- Firstly, there is an overwhelming dominance of physical investments like gold and real estate in most Indian households’ portfolios. 88 per cent of an Indian investor’s wealth is in gold and real estate, a dominance not seen in any other large economy of the world.
- Secondly, the culture of stock market investments in India is only two decades old.
- Thirdly, unlike the stock markets in some developed countries, the Indian stock market has very few great companies that sustain leadership over long periods of time.
The average probability of a sector leader remaining a sector leader five years later is only 15 per cent, implying that 85 per cent of BSE500 companies slide towards mediocrity.
Even the Nifty ‘churns’ by around 50 per cent or so every decade (as compared to around 25 per cent for developed markets and around 30 to 40 per cent in other major emerging markets).
An affluent professional or entrepreneur should read it chapter by chapter, and his/her portfolio should be spread across both equities and bonds.
CHAPTER 1 Mr Talwar’s Uncertain Future
‘The best time to plant a tree was twenty years ago. The second best time is now.’ —ancient Chinese saying
The past had to be left behind.
More often than not, stocks appreciate when one least expects them to. And they do not appreciate evenly.
Listed below are the seven basic investment mistakes most of us make.
No clear investment objective/plan: If you don’t know where you are going, you will probably end up in the wrong place.
Trading too much, too often: Too many people trade too much, too often and do not reap the benefits of long-term investing and sensible asset allocation. Repeated trading and modification in investments usually lead to lower returns and higher transaction costs
Lack of diversification: Different assets carry different kinds of risk and return potential. Hence, diversifying your portfolio is very important to insulate yourself from shocks in a particular asset class.
High commissions and fees: Paying a higher fee on your investments over the long term can have a significant impact on the performance of your portfolio.
Chasing short-term returns: Most investors chase higher returns or yields on their investments without really knowing the risk attached to them.
Timing the market: Markets do not move linearly and are inherently volatile. Whilst there are indicators of various kinds that reflect the market trend at any given point of time, this does not mean that one can accurately determine when to enter or exit the markets.
Ignoring inflation and taxes: Most investors focus on absolute returns instead of looking at real returns. To arrive at actual returns from your investments, you need to adjust for (or subtract) the impact of inflation and taxes.
Most Indians do not invest in equity at all. Those who do, do so in a very haphazard manner.
Three takeaways from this chapter:
- It is critical for an investor to nail down objectives and bake them into a financial plan.
- It is important to not adhere to the age-old wisdom of investing heavily in fixed deposits, real estate and gold.
- Equity remains the most powerful driver of long-term sustainable returns. However, investors need to be patient and systematic with equity investments.
CHAPTER 2 Coffee Can Investing
‘For indeed, the investor’s chief problem—and even his worst enemy—is likely to be himself.’ —Benjamin Graham, The Intelligent Investor
Successful equity investing largely hinges around answering two simple questions:
- Which stocks should I buy? and
- For how long should I hold the stocks I bought?
Incorrect investment theories—the most common one being that to make higher returns from the stock markets, one must take higher risks.
‘An investment in knowledge pays the best interest.’ —Benjamin Franklin
Warren Buffett explains that the kind of companies he likes to invest in are ‘companies that have a) a business we understand; b) favourable long-term economics; c) able and trustworthy management; and d) a sensible price tag.
The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning high returns.
Business history is filled with “Roman Candles”, companies whose moats proved illusory and were soon crossed.
A moat that must be continuously rebuilt will eventually be no moat at all. Long-term competitive advantage in a stable industry is what we seek in a business’.
‘When we own portions of outstanding businesses with outstanding managements, our favourite holding period is forever. We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint. Peter Lynch aptly likens such behavior to cutting the flowers and watering the weeds.’
People confused “simplicity” with “ease”. Buffett’s methodology was straightforward, and in that sense “simple”. It was not simple in the sense of being easy to execute.
The common wisdom was dead wrong; the little guy could invest in the market, so long as he stuck to his Graham-and-Dodd knitting. But many people had a perverse need to make it complicated.
In an environment like India, where you always have so many “perceived good opportunities”, if you invest in poor capital allocators, you will never get a return.
Good management teams create optionality for you . . . in an environment like India, smart managers can create a lot of wealth.
There are a limited number of companies in India where everything lines up . . . good business, capable and ethical management, you have access to the management: such combinations do not come that often.’
The Coffee Can Portfolio: Robust returns with a low degree of uncertainty.
Kirby, in a note written in 1984, narrated an incident involving his client’s husband. The gentleman had purchased stocks recommended by Kirby in denominations of US$5000 each but, unlike Kirby, did not sell anything from the portfolio.
Kirby coined the term ‘Coffee Can Portfolio’, a term in which the ‘coffee can’ harks back to the Wild West, when Americans, before the widespread advent of banks, saved their valuables in a coffee can and kept it under a mattress.
In order to truly become rich an investor has to let a sensibly constructed portfolio stay untouched for a long period of time
To begin with, of the approximately 5000 listed companies in India, we will limit our search to companies with a minimum market capitalization of Rs 100 crore, as the reliability of data on companies smaller than this is somewhat suspect. There are around 1500 listed companies in India with a market cap above Rs 100 crore. Then, we look for companies that over the preceding decade have grown sales each year by at least 10 per cent alongside generating Return on Capital Employed (pre-tax) of at least 15 per cent.
A company deploys capital in assets, which in turn generate cash flow and profits. The total capital deployed by the company consists of equity and debt.
ROCE is a metric that measures the efficiency of capital deployment for a company, calculated as a ratio of ‘earnings before interest and tax’ (EBIT) in the numerator and capital employed (sum of debt liabilities and shareholder’s equity) in the denominator.
Adding the risk-free rate (8 per cent in India) to the equity risk premium of 6.5 to 7 per cent gives a cost of capital broadly in that range.
India’s nominal GDP growth rate has averaged 13.8 per cent over the past ten years. Nominal GDP growth is different from real GDP growth as unlike the latter, nominal GDP growth is not adjusted for inflation.
For financial services stocks, we modify the filters on ROE and sales growth as follows: ROE of 15 per cent: We prefer Return on Equity over Return on Assets because this is a fairer measure of banks’ (and other lenders’) ability to generate higher income efficiently on a given equity capital base over time. Loan growth of 15 per cent: Given that nominal GDP growth in India has averaged 13.8 per cent over the past ten years, loan growth of at least 15 per cent is an indication of a bank’s ability to lend over business cycles.
Historical data suggests the Coffee Can Portfolio offers more than a 95 per cent probability of generating a positive return as long as investors hold the portfolio for at least three years. If held for at least five years, there is more than 95 per cent probability of generating a return greater than 9 per cent.
A run rate of 26 per cent return per annum results in the portfolio growing in size to ten times in ten years, 100 times in twenty years and 1000 times in thirty years.
‘The ancient Romans were used to being defeated. Like the rulers of history’s great empires, they could lose battle after battle but still win the war. An empire that cannot sustain a blow and remain standing is not really an empire.’ —Yuval Noah Harari, Sapiens:
The ‘greatness’ of a kingdom or an empire should be measured by its longevity. How long did the empire last? How durable was it?
If longevity is the measure of a great empire, then the Roman Empire is possibly the greatest empire the world has ever seen. Whilst the first Roman republic, headquartered in Rome, lasted from 100 BC to 400 AD, the imperial successor to the Republic lasted for a staggering 1400 years before falling to the Ottoman Turks in 1453.
When it comes to investing in stock markets, greatness is defined as ‘the ability of a company to grow whilst sustaining its moats over long periods of time’.
‘Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns.’
‘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.’
Earnings is the biggest driver of stock market returns in the long run.
Rather than considering earnings growth as an independent metric by itself, it is more useful to see earnings growth to be an outcome of two independent parameters—growth in Capital Employed in a business and the firm’s ability to generate a certain Return on the Capital Employed (ROCE).
‘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.
Warren Buffett in his 2007 letter to shareholders defined three categories of businesses based on Return on Capital:
High earnings businesses with low capital requirements.
Businesses that require capital to grow and generate decent ROCE.
Growing businesses have both working capital needs, which increase in proportion to sales growth, and significant requirements for fixed asset investments.
Such businesses also form a decent investment option as long as they enjoy durable competitive advantages that can lead to attractive return on the incremental capital employed.
Businesses that require capital but generate low Returns on Capital.
A critical feature of the Coffee Can Portfolio is that not only does it use the twin filters (ROCE above 15 per cent and revenue growth of 10 per cent) to identify great companies, but it also then holds these companies for ten years.
Here are four compelling factors that go against churn in a portfolio composed of great companies:
Higher probability of profits over longer periods of time: As is well understood, equities as an asset class are prone to extreme movements in the short term.
The power of compounding: Holding a portfolio of stock for ten years or more allows the power of compounding to play out its magic. Over the longer term, the portfolio comes to be dominated by the winning stocks whilst losing stocks keep declining to eventually become inconsequential.
Neutralizing the negatives of ‘noise’: Investing and holding for the long term is the most effective way of killing the ‘noise’ that interferes with investment decisions.
Transaction costs: By holding a portfolio of stocks for over ten years, a fund manager resists the temptation to buy/sell in the short term. This approach reduces transaction costs that add to the overall portfolio performance over the long term.
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.
Starting-period valuations have very little impact on long-medium run investment returns in India. The lack of correlation between starting-period valuations and long-term holding period returns seems to be specific to India.
In the Indian stock market, a low P/E multiple-based investing approach does NOT improve the return profile of an investor.
Given this analysis of value investing, it’s clear that investors in Indian stock market should stick with high-quality franchises for the long haul without giving undue importance to valuations.
Given the desire for longevity and consistency of performance around ROCE and revenue growth, the Coffee Can Portfolio is oriented towards the following themes:
More B2C (Business to Consumer) than B2B (Business to Business) sectors: By definition, a B2C firm is one which sells its products or services directly to the end-consumer unlike a B2B firm which sells to another business.
Most B2C businesses are in sectors like consumption (in the broadest sense of the word), banking and pharma.
Within B2C, the Coffee Can portfolio attracts businesses with smaller ticket size and repeat purchase of products and services.
Due to its proximity with the end-consumer, a great B2C firm is better able to respond to or drive an evolutionary trend of its end-consumer.
More structural rather than cyclical plays:
Historically the only ten-year periods when cyclical stocks18 outperformed structural (non-cyclical) stocks were when the commodities cycle was roaring.
A long-term investor who wants to successfully invest in structural stocks needs to follow a thorough bottom-up analysis of the stock and sector under consideration.
Avoiding companies that borrow lots of money to grow: Leverage on the balance sheet is beneficial to the extent that it either improves capital efficiency.
However, we avoid companies which need leverage to grow revenues, e.g. power, steel and real estate sectors.
The illiquidity of their asset base reduces the flexibility required to evolve the company over longer periods of time.
Prefer companies with intangible strategic assets: Strategic assets are those that give a firm a platform over which it can build a stack of initiatives like raw material procurement, product development, marketing strengths, great distribution, pricing power, supply chain, etc., and hence sustain competitive advantages.
Intangible assets can either include intellectual property (patents or proprietary know-how), licences or culture-oriented aspects like: a) hiring, incentivizing, empowering and retaining top-quality talent; b) using IT (technology) investments not just as a support function, but as a backbone of the organization to ensure all aspects of the business are process-oriented and hence efficient; or c) proactively looking after the company’s channel partners, vendors and employees at times when they undergo personal or professional crises.
CHAPTER 3 Expenses Matter
‘Beware of little expenses. A small leak will sink a great ship.’ —Benjamin Franklin
In the investment world, there are primarily three types of expenses that the investor, knowingly or unknowingly, pays for:
Transaction fees: Also called brokerage, it is the fee you end up paying every time you enter a transaction.
Annual fees: This is more typical of funds (like mutual funds and PMS) wherein the fund manager charges an annual fee which can actually be paid on a monthly or quarterly basis as well.
Hidden fees: In insurance products and structured products, it is not easy for investors to understand exactly what fees are being charged. In structured products,2 for example, the investor could be given a formula for the return on his principal but that is really the net return in his hands.
A twenty-year-old who invests Rs 1 lakh when he/she starts working will get Rs 1.11 crore when they retire (at sixty) from the first fund which has a 2.5 per cent expense ratio. From the second fund, which has a 0.1 per cent expense ratio, he/she will get Rs 2.58 crore.
We cover this transformation in the industry through three central themes: The ‘Alpha Squeeze’ in actively managed funds, The introduction of inexpensive fund options and direct schemes in mutual funds, and The advisory-led offering versus the distribution-led offering.
An expense borne by the fund house is ultimately a fee that you as an investor will pay. To a consumer of a service, as long as the service is making sense, the expenses are not a problem.
From massive outperformance a decade ago, actively managed funds in India struggle to eke out meaningful outperformance today.
Not only has 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.
Direct code investments give investors an option to deal directly with the fund house without any intervention by intermediaries like distributors, agents, financial planners, banks, etc. The process to buy the scheme remains the same, except that the investor keeps the broker code field empty in a mutual fund application form.
The regulations announced in 2013 state that an intermediary can only be an adviser or a distributor—he cannot be both. Thus, a distributor cannot be seen as recommending a mutual fund scheme.
The three key takeaways from this chapter:
- Fund expenses are often ignored but are deceptively important. Given their compounding over long periods, they have the ability to drag down investor returns drastically.
- Unlike earlier years, the alpha (or outperformance) in large-cap equity mutual funds is now negligible. In this scenario, it makes much more sense to invest in passive funds or ETFs.
- A broker suggesting funds to an investor leads to a conflict of interest. Driven by SEBI, the country has already moved on to an ‘only advisory’ or ‘only broking’ model.
CHAPTER 4 The Real Estate Trap
‘He is not a full man who does not own a piece of land.’ —Hebrew proverb
‘Many of the truths we cling to depend greatly on our point of view.’ —Obi-Wan Kenobi, legendary Jedi Master
Real estate is a uniquely dangerous asset class for investors for the following reasons:
Investment size: You can buy a stock for Rs 500 and a mutual fund for Rs 5000, but you need to have a few lakhs with you for investing in the cheapest of properties.
Liquidity: Compared to financial assets such as stocks and bonds, and even compared to physical assets such as gold and silver, real estate is an illiquid asset class.
Transaction costs: Stamp duty, registration and other transaction charges associated with buying property now exceed 10 per cent of the cost of the property.
Non-standard assets:
A murky sector: Residential real estate is one of the least clean sectors in India.
Since 1900, real estate in the US has given an annual compounded return of 0.4 per cent as against an annual return of 5 per cent from the Dow Jones,
Adjusted for earnings, Indian property is easily among the most expensive in the world.
The three key takeaways from this chapter:
- In India and developed markets, real estate has given far lower returns compared to equity over long periods of time. Along with that, its high correlation with equity means that real estate offers little by way of diversification.
- Real estate is the most illiquid asset with the highest transaction costs, which are now in excess of 10 per cent.
- India has had a once-in-a-lifetime bull run in real estate between 2003 and 2013.
CHAPTER 5 Small Is Beautiful
‘At the end of the day, small business success should just be a way station on your way to large business success.’ —Lloyd Blankfein, CEO, Goldman Sachs
Why should a portfolio of ‘great’ small-caps outperform the broader large-cap universe?
Smaller companies have the potential to grow their profits much faster than large companies and, secondly, as small companies grow they are ‘discovered’ by the stock market.
Small-cap companies grow faster: Fundamentally, smaller companies’ profits grow faster than large-caps, particularly in periods when credit availability is plentiful, economic growth is accelerating, and there are ample undervalued competitors
Small-cap companies get ‘discovered’: More often than not, small-cap firms suffer from neglect because they are not in the news and are not covered by the major brokerage houses.
The three key takeaways from this chapter
- Over the past two decades, small-caps have outperformed large-caps in most large stock markets.
- Ever since the NDA-led government launched its multi-pronged attack on black money in India (2015), affluent Indians have diverted savings away from real estate and towards the financial system.
- Whilst the scope for generating superior long-term investment returns is greater with small-caps, the need for professional help is disproportionately greater.
CHAPTER 6 How Patience and Quality Intertwine
‘I have seen many storms in my life. Most storms have caught me by surprise, so I had to learn very quickly to look further and understand that I am not capable of controlling the weather, to exercise the art of patience and to respect the fury of nature.’ —Paulo Coelho
‘We regret losses two to two-and-a-half times more than similar-sized gains.’
Investors who do not have even a year of patience are likely to believe that ‘more often than not, people lose money in equity markets’.
The more frequently we evaluate our portfolios (and hence the shorter our investment horizon is), the more likely we are to see losses and hence suffer
‘Patience premium’. This is the difference between annualized returns generated by a stock or an index over any holding period compared to the return generated by the same stock or index over a one-year holding period. A positive value of ‘patience premium’ implies that the longer the holding period of a stock, the higher is the return generated from it for an investor.
Median equity returns for the Sensex are the highest over the ten-year investment horizon.
As the holding period increases from one year towards three and five years, volatility (and hence risk) of returns for a Sensex investor reduces significantly
BSE Sensex’s one-year investment horizon is the riskiest with risk levels being six times that of the ten-year horizon.
A positive value of the ‘quality premium’ implies that increasing the quality of the stock portfolio generates better returns for the same investment horizon.
Observation No. 1: The shorter the holding period, the higher the quality premium
The late Peter Roebuck, one of the world’s greatest cricket writers, wrote, ‘Dravid has a simple game founded upon straight lines. Reasoning that runs cannot be scored in the pavilion, he sets out to protect his wicket. Curiously, this thought does not seem to occur to many batsmen, a point many a long-suffering coach could confirm.
The quantum of the quality premium is higher for shorter holding periods.
The ‘Quality Premium’ (Coffee Can Portfolio median returns minus Sensex median returns) exists for all investment horizons.
The CCPs are full of companies that are the Rahul Dravids of the business world—rare, determined and constantly seeking to improve the edge or the advantage they enjoy vis-à-vis their competitors.
Observation No. 2: A high-quality portfolio with a very long holding period delivers the highest return with the lowest risk
The three key takeaways from this chapter:
- Patience premium in equity investing: Given the behavioural concept of ‘Myopic loss aversion’ defined by Shlomo Benartzi and Richard Thaler, investors who do not have even a year of patience, i.e. stock holding periods less than one year, are likely to believe that ‘more often than not, people lose money in equity markets’.
- Quality premium in equity investing is higher for shorter time periods:
- Combining quality premium with patience premium: Whilst both the Sensex and the Coffee Can Portfolio (CCP) produce better returns (alongside lower volatility) if held longer, the CCP beats the Sensex by a wide margin when it comes to producing superior returns (with its volatility being even lower than that of the Sensex).
CHAPTER 7 Pulling It All Together
‘A man who has committed a mistake and doesn’t correct it is committing another mistake.’ —Confucius
‘Never forget that risk, return, and cost are the three sides of the eternal triangle of investing.’1 —John C. Bogle,
Essentially, what this book has highlighted is that: Investing for long periods of time in high-quality portfolios . . . . . . with a higher weightage to high-quality small-cap companies . . . . . . while ensuring that you don’t pay too much by way of fees . . . . . . and avoiding investment traps like real estate and gold . . . . . . should lead to significant and sustainable wealth creation.
Warren Buffett’s famous two rules on investing are:
- Rule No. 1 – Never lose money.
- Rule No. 2 – Don’t forget rule number 1.
Debt was like the non-striker in a batting partnership, somebody who will hold the other end whilst the big hitting and runs will be scored by the striker, which is equity in this case.
A debt mutual fund’s return is a function of: 1. Yield to Maturity (YTM), 2. Mark to Market (MTM), 3. Expense Ratio. In its most simplistic form, Debt Mutual Fund’s Return = YTM + MTM – Expense
The inverse correlation of 92 per cent shows the strength of the connection between credit score and YTM, implying that the higher returns given by higher performing debt funds are largely a function of the extra credit risk that the debt fund manager is taking.
The central theme in all our chapters is the power of compounding, which needs time to show its effectiveness.
India today presents a colossal opportunity for those who want to patiently and systematically generate wealth over the next two decades. While large-cap stocks will be the anchor for most investors, mid- and small-cap stocks have the potential to give super-normal returns to the investor.
Ultimately, investment is as much about discipline as it is about being smart.
The three key takeaways from Coffee Can Investing: The Low-Risk Road to Stupendous Wealth
- Create a financial plan which helps you deliver on your life goals. Unless you do so, you will be shooting in the dark.
- Understand the power of expenses.
- Understand the power of high-quality investing and patience. There is an inherent volatility in the equity markets.
CHAPTER 8 Designing Your Own Financial Plan
‘Some people want it to happen, some wish it would happen, others make it happen.’ —Michael Jordan, basketball legend1
The essential link between your investment style and your financial objective is made through financial planning.
Our income usually stops at retirement whereas expenses continue till we die.
Step 1: Key in your cash flows
Step 2: Key in your current portfolio and assets
Step 3: Key in your goals
Financial planning is a dynamic exercise and needs to be carried out periodically or whenever any significant change occurs in your cash flow, assets or goals.
APPENDIX 1 Detailed Coffee Can Portfolios
Total shareholder return assumes reinvestment of dividends received from each stock back into the same company’s shares on the date of receipt of this dividend.
While each of the seventeen iterations has generated strong performance relative to the Sensex on an overall portfolio basis, not every stock in the CCPs has delivered stellar returns. To put things in perspective, over the seventeen iterations, an average Coffee Can Portfolio consists of twelve companies. Of these twelve companies, two to three companies gave stellar returns over a ten-year period (we highlight such stocks when we discuss each portfolio in detail below) and two to three companies gave low to negative returns over the same period. The rest of the portfolio has given broadly market returns. This is the nature of the construct of a Coffee Can Portfolio.
Every single Coffee Can Portfolio has outperformed the overall market due to the reasons listed below: As the time period increases, the probability of generating positive returns increases.
In the long run, the portfolio becomes dominated by winning stocks whilst the losing stocks keep declining to eventually become inconsequential.
Investing and holding for the long-term is the most effective way of killing ‘noise’ that interferes with the investment process.
Lack of churn reduces transaction costs, which adds to the overall portfolio performance over the long term.
APPENDIX 2 How Punchy Can the P/E Multiple of a Great Company Be?
The interesting thing about earnings is that not only can they be manipulated according to the whims of the management team, but they only provide information about how much profit a business can generate every year and NOT about the re-investments of those earnings necessary to keep the business running. The cash flow figures, on the other hand, describe clearly how much of the profit is actually left for shareholders.
Conviction on fundamentals will give healthy returns even with high entry P/E.
APPENDIX 3 Should Investors Sell Coffee Can Stocks When Markets Are Richly Valued?
Trying to time the market and using market-level valuations as a guide to especially make ‘sell’ decisions prove to be counter-productive as companies with sound fundamentals and excellent return ratios will continue to look expensive.
APPENDIX 4 How Coffee Can Portfolios Outperform during Market Stress
The performance trajectory of the Coffee Can Portfolios (CCPs) consistently generate the following outcomes:
- The CCPs tend to fall less than the overall stock market.
- The recovery following the crash is faster and stronger for CCPs compared to that of the broader market.
CCP companies would, more often than not, deliver positive returns due to one of the following two factors: Earnings growth more than offsets the P/E de-rating during periods of stock market stress: Stressed periods of the stock market usually occur due to deterioration in earnings growth prospects of the constituent stocks compared to what are already factored into the share prices.
P/E does not derate because the market incrementally factors in longevity of earnings: As CCP stocks tend to deliver consistent revenue and earnings growth during periods of weakness in fundamentals for the broader market, it is likely that P/E multiples of CCP companies start factoring in a greater degree of sustainability of earnings growth over the longer term in future.
APPENDIX 5 The Role of Starting Period Valuations in Determining Investment Returns
Contrary to popular expectations, starting period valuations do not play a role in determining returns over a medium-to-long term horizon.
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