Listen to the deep-dive discussion – The Coffee Can Strategy for 100-Baggers (37:10)
Every system needs rules. But every good system also needs to know when to break them.
The buckets, lenses, and selection criteria provide structure. They prevent emotional decisions. They enforce discipline. But rigidly applied, they can also prevent extraordinary outcomes.
The 100-bagger sold at 5x because the “harvesting lens” said to trim. The compounder that grew to 40% of the portfolio—and kept compounding. The position that broke every allocation rule but made the retirement.
This section is about exceptions: when the rules bend, when they break, and when breaking them is the right decision.
The 100-Bagger Problem
Here is the uncomfortable truth about extraordinary returns: they cannot be predicted.
Ex ante, a future 100-bagger looks like a good company (Bucket 3) or an interesting speculation (Bucket 4). It has solid fundamentals, or intriguing optionality, or both. But so do dozens of other positions that will deliver 2x or 3x—or zero.
Ex post, the 100-bagger is obvious. “Of course Amazon was going to dominate e-commerce.” “Of course Microsoft would own enterprise software.” But at the time? The outcome was uncertain. The path was volatile. There were a hundred reasons to sell.
The dilemma:
- Systematic harvesting (as the system prescribes for Amplifiers) means selling the future 100-bagger at 3x, 5x, or 10x. A good return is locked in while an extraordinary one is missed.
- Never harvesting (hoping everything becomes a 100-bagger) means the 96% of positions that disappoint drag the portfolio down—or return to zero.
The system cannot tell in advance which position will be the outlier. But it can identify when a position has earned the right to be treated differently.
The Coffee Can Portfolio
The term comes from the Old West, when people would put their valuables in a coffee can and hide it under the mattress. They couldn’t check it. They couldn’t tinker. They just let it sit.
Robert Kirby formalized this as an investment strategy: buy quality, then forget about owning it. No trimming. No harvesting. No “rebalancing.” Just time.
The logic is simple: the biggest risk to a compounder is the investor.
Every sale is an interruption. Every interruption resets the compounding clock. Every reset incurs taxes, transaction costs, and reinvestment risk. The investor who “optimizes” often destroys more value than the investor who does nothing.
But there’s a catch:
The Coffee Can only works if the right things go in the can. A coffee can full of Amplifiers is a disaster. A coffee can full of declining businesses is slow death.
The Coffee Can is not a strategy. It is an exception—reserved for positions that have demonstrated they deserve to compound undisturbed.
The Five Criteria of Untouchability
When does a position earn the right to escape normal rules? When five conditions accumulate:
- Invariant ROIC
The company’s return on invested capital remains high across multiple economic cycles. Not just in good times—through recessions, rate hikes, competitive threats. The moat has been stress-tested.
- Frictionless Reinvestment
The company can absorb massive amounts of capital without diluting returns. It is not yet constrained by market size or diminishing opportunities. The runway extends for decades.
- The Moat Paradox
The larger the company gets, the stronger it becomes. Network effects, scale economies, or ecosystem lock-in create a self-reinforcing advantage. Size is a feature, not a bug.
- Non-Existential Volatility
The stock price swings—sometimes dramatically—but these swings no longer threaten the portfolio’s survival. A 30% drawdown in this position is painful but not catastrophic, because the Shield (Cash + Index) provides protection.
- Inverted Asymmetry
The risk of selling (taxes + friction + reinvestment error + missing future compounding) mathematically exceeds the risk of holding. The expected cost of action is higher than the expected cost of inaction.
When all five conditions are met:
The position has earned Untouchability. Normal harvesting rules are suspended. The position can grow beyond typical allocation limits. The Coffee Can closes.
The Veto Power of Exceptions
Here is where the system bends:
The allocation rules (Section III) state that Bucket 3 should be approximately 50% of the portfolio. But what happens when a single position—through compounding, not through new purchases—grows to 40%? 50%? 60%?
The traditional answer: Trim. Rebalance. Restore the allocation.
The exception answer: If the position meets the five criteria of Untouchability, the exception has veto power over the allocation.
This is the “Rich Person’s Problem.” Microsoft grew from 5% to 35% of the portfolio. The rules say trim. But trimming means: – Paying taxes on decades of gains – Losing future compounding on the sold shares – Finding somewhere else to deploy the capital (with reinvestment risk) – Possibly being wrong about the timing
The resolution:
Extreme success breaks allocation rules—and that is acceptable, as long as survival is not threatened.
The question is not “Does this position exceed my allocation target?” The question is “If this position fell 50%, would I still be in the game?”
If the Shield (Cash + Index) is intact, if the position’s decline would be painful but not fatal, then the exception stands. The compounder keeps compounding.
The Buffett Nuance
Warren Buffett famously said his favorite holding period is “forever.” This is often misunderstood as “never sell.”
Buffett sells.
He sold airline stocks in 2020 when the pandemic threatened the industry. He trimmed Apple when it became 40%+ of Berkshire’s equity portfolio. He exited banking positions when he saw systemic risk.
The pattern:
Buffett does not sell because a stock went up. He does not sell to “lock in profits.” He does not sell because of allocation rules.
He sells when the risk of ruin rises.
- Sector risk: The entire industry faces existential threat (airlines during COVID)
- Concentration risk: A single position becomes so large that its failure would be catastrophic (Apple at 40%+)
- Thesis risk: The original investment thesis is broken (not just challenged—broken)
The lesson:
“Forever” does not mean “blind.” It means: hold until the risk profile fundamentally changes. If the position still meets the Untouchability criteria, hold. If the risk of ruin has increased—even for a beloved compounder—act.
If the Oracle of Omaha trims winners to manage risk, no one should feel guilty for doing the same.
The Graduation Path
Positions are not permanently assigned to buckets. They move.
Bucket 4 → Bucket 3 (Graduation)
An Amplifier proves itself. The business model works. Cash flows materialize. The speculation becomes a compounder.
This is the ideal outcome for Bucket 4: the asymmetric upside was captured during the speculative phase, and now a proven compounder is held for the long term.
Example: Tesla was bought as an Amplifier at $50. It was speculative—unproven manufacturing, uncertain demand, Elon risk. It 10x’d to $500. But now the business is established: profitable, dominant in EVs, cash-generative. It graduates to Bucket 3. Different rules apply.
Bucket 3 → Bucket 4 (Demotion)
A compounder deteriorates. The moat erodes. Competition intensifies. The thesis weakens.
The position is no longer a reliable compounder, but it’s not yet a sell. It becomes a turnaround speculation—an Amplifier with option value on recovery.
Example: Intel was owned as a Bucket 3 compounder. But the foundry strategy is struggling, market share is lost, the thesis is damaged. It moves to Bucket 4: smaller position size, different expectations, harvesting rules apply if it recovers.
Bucket 3 → Untouchable (Rare)
A compounder demonstrates all five criteria over many years. It earns the right to escape normal rules entirely.
Example: Berkshire Hathaway, held for 20+ years, has proven its durability across multiple cycles. It qualifies for the Coffee Can.
The Fatal Errors
Exceptions are privileges, not rights. They can be abused. The following errors destroy wealth:
- The Categorization Error
Treating an Amplifier as a Compounder. A speculative stock is bought, it doubles, and instead of harvesting the decision is made that it’s a “long-term hold.” Miscategorization has occurred. When it crashes 70%, the position is trapped—it was never meant to be a core holding.
The rule: A position earns its category through demonstrated fundamentals, not through price appreciation.
- The Interruption Error
Selling a true compounder to “lock in profits.” The stock is up 3x! Time to take some off the table. But the business is compounding at 20% annually. By selling, the exponential curve has been interrupted, taxes have been paid, and somewhere else to reinvest must now be found.
The rule: Do not interrupt compounders. Monitor them. But do not optimize them.
- The Leverage Error
Using margin or leverage because of confidence. Leverage transforms temporary volatility into permanent loss. A 40% drawdown on a leveraged portfolio can trigger forced liquidation—the absorbing barrier. An infinite game has been converted into a finite one.
The rule: Never use leverage on concentrated positions. The upside is linear; the downside is ruin.
- The Tax Tail Error
Letting tax consequences drive investment decisions. “I can’t sell—I’ll owe $100,000 in taxes.” But the position has become 50% of the portfolio, the business is deteriorating, and holding continues out of tax avoidance. The tax tail is wagging the investment dog.
The rule: Taxes are a factor, not the factor. A 20% tax on a gain is better than a 100% loss on a reversal.
- The Narrative Error
Holding because of story, not fundamentals. “This company is changing the world.” “I believe in the mission.” “It’s the future.” Narratives feel good. But narratives don’t compound. Cash flows compound. When the narrative diverges from the fundamentals, the fundamentals must be trusted.
The rule: Love the business, not the stock. When the business changes, attachment must not prevent action.
The Hierarchy of Decisions
When rules conflict, this hierarchy resolves them:
| 1. SURVIVAL (Ergodicity Lens)
Does this decision threaten my ability to stay in the game? If yes → Do not proceed, regardless of upside. |
| 2. UNTOUCHABILITY CRITERIA
Does this position meet all five criteria? If yes → Normal rules may be suspended. |
| 3. ALLOCATION RULES
Is the portfolio balanced according to the bucket structure? If not → Consider rebalancing. |
| 4. HARVESTING TRIGGERS
Has a position hit a harvesting threshold? If yes → Execute unless Criteria 2 applies. |
Survival always wins. Untouchability overrides allocation. Allocation overrides mechanical harvesting.
The hierarchy ensures that exceptions serve the system rather than subvert it.
The Discipline of Exceptions
Exceptions are not escape hatches for emotional decisions. They are earned privileges with strict criteria.
Before invoking an exception, ask:
- Has this position demonstrated Untouchability through performance, not hope?
- Is my survival intact if this exception is wrong?
- Am I invoking the exception because of evidence, or because of attachment?
- Would I make this same decision if I had no position and were evaluating fresh?
If the answers are yes, yes, evidence, and yes—the exception stands.
If any answer is uncertain—the rules apply.
The structure is complete. Philosophy governs allocation. Allocation creates the buckets. Lenses calibrate every decision. Selection fills the buckets with worthy assets. Exceptions handle the edge cases.
What remains is to step back and see the whole.