First comes the dopamine rush.
Next comes the feeling of unbelievable pleasure and well-being that replaces the anxiety, and some days even dread, associated with daily life. Everything — mentally, physically, emotionally, spiritually — becomes instantly, magically better.
At that moment, it is the best feeling in the world. Because nothing focuses you like the first hit of coffee in the morning. We simply cannot function without it.
Admittedly, we may be seen as "coffee snobs", but we like to see ourselves more as coffee enthusiasts. We only use a Chemex coffee maker, which is, in fact, on permanent display in the Museum of Modern Art in New York. We only buy whole beans from one place in all of Cleveland, where the proprietor actually goes to the origin of the bean to source for his coffee shop and roasts on site. We enjoys the ritualistic process of preparing coffee in the morning … grinding, measuring, ensuring the right water temperature, the pour over, and, of course, each sip of deliciousness. We have no idea how anyone can add cream or other dilutive flavors to the magnificence of coffee … it borders on insanity and an assault on the taste buds.
However, when one has such a strong love of coffee, you must also pay close attention to the price of it. Two types of beans, Arabica and Robusta, trade on commodity exchanges in New York (Arabica) and London (Robusta) — as buyers and sellers of coffee hedge to protect the price for future deliveries and purchases. Interestingly, the price of coffee is the lowest it has been since 2006 and trades at the same price level as it did back in 1976.
The price of coffee going nowhere for over 40 years may seem strange, but that is the nature of commodities. Recall back in December of last year when I addressed the bitcoin phenomenon). That same blog discussed how we as a firm put anything that can be valued or priced into four buckets: cash-generating assets, commodities, currency and collectibles.
Coffee clearly fits the commodity definition nicely: it is a raw material that meets a fundamental (and very necessary!) human need. Though we do love our coffee, Sequoia is not going to invest in coffee or any other commodities for that matter. Here’s why (back to that bitcoin post):
We think it is important to understand the difference between investing in cash-generating assets and "trading" commodities, currencies and collectibles. To invest in something, you need to assess its value, compare it to its price and then act on that comparison, buying if the price is less than its value and selling if it is greater. Trading is an exercise where you price something based on a judgment (informed or otherwise) on whether that price will go up or down in the future and then make a pricing bet. Trading is a much more difficult enterprise because the price is based on opinion and divorced from value.
Our clients pay us to be investors and only invest in that which can be valued and will have the best chance of adding value to the goal of meeting their long-term wealth plans. We stick with asset classes like equities, fixed income and real estate. Our clients do not pay us to be "traders" with their investible assets.
Therefore, we stay away from commodity and currency trading and focus on cash-generating assets, such as common stocks. Interestingly, if you look at the long-term performance of Starbucks, shown in green below, versus the price of coffee in orange, the investment return is staggeringly different:
Since Starbucks went public in 1992, the stock, a cash-generating asset, has returned 15,274% versus a 76% return for the price of coffee over the same period. Cash-generating assets in the form of common stocks can take commodity inputs such as coffee beans and add a lot of value through very positive returns on invested capital. This leads to a higher market valuation, i.e., higher stock prices and better outcomes for investor portfolios.
And so, while the coffee bean will continue to draw no interest from us as investors, it will continue to generate a certain life source and will be the recipient of our unwavering allegiance and gratitude each and every morning (noon, and sometimes even at night).
Contact Russell Moenich to learn more about this topic.
330.255.4330 | firstname.lastname@example.org