Derek Foster Interview – Part 1

Derek FosterDerek Foster needs no introduction! He quit the rat race at 34 and became a millionaire using simple investment strategies.  He shared his unique approach in his five National Bestselling Books, including STOP WORKING: Here’s How You Can, and The Idiot Millionaire.

Derek also offers regular financial tips in Canadian MoneySaver Magazine and he has been featured in various media across Canada.  When not writing or giving public speaking presentations about investing, Derek spends his time with his wife and five children (which can be quite a handful). Love him or leave him, Derek Foster is an inspiration to many investors using a dividend focused strategy to fund their (hopefully early) retirement.

I was really impressed with Derek’s ability to answer my questions in such depth and candor, without prior review. I really appreciate him taking the time. I hope you enjoy my Friday the 13th Interview (in 2 parts) with Derek Foster:

Dividend Ninja:
Hi Derek, I wanted to say thanks very much for taking the time out of your busy schedule to come and visit the Dividend Ninja. I know many of my readers, as well as divided investors whom you’ve inspired will really enjoy this interview. It’s a real pleasure, so thanks again!

Derek:
Thank you as well, and cool name for the website by the way!

Dividend Ninja:
Thanks Derek! You mention to readers you are Canada’s youngest retiree at 34. Even if you started investing in your early 20’s, and ate nothing but Mr. Noodle for days on end, or didn’t feed your kids, how did you do it?

Derek:
When I started I was a cheap kid! You know how kids got their allowance and they would run off and get candy for $2 bucks or whatever. Well I saved. I remember when I was 10 or 12 and I got my first thousand dollars – I was really proud I saved that up. As a young kid I had a propensity for saving. When I was in university I had about $15K or something, but once I graduated I was very focused on saving.

But to be honest, and this is not an approach I would recommend most people do, but I also used margin. The 1990’s were a phenomenal time to be in U.S. stocks, and I did very well. If I was to take a time machine and go back, I wouldn’t have taken on that risk.

Dividend Ninja:
So this is also a good time for Canadians to be buying U.S. Stocks, isn’t it? Especially with the Canadian Dollar doing so well. I just piled up on McDonalds at $75 and wishing I bought JNJ as well. What are your favourite U.S. Stocks, and which ones would you definitely avoid?

Derek:
I’m not a very smart guy, so I look for simple things, something I can understand. Things like Colgate Toothpaste, Coca-Cola, JNJ, things that I can see touch and feel. So those are the stocks I gravitate towards.  I would totally avoid anything that’s dependent on the economy. Airline stocks are the worst I can think of. You know like automotive stocks are terrible, I mean they had to be recently bailed out of bankruptcy with government money. And to be honest I’m a technological idiot, so anything technology based I don’t touch. I might miss out on some opportunities, but so be it – I just don’t go there.

(Derek and I also discuss the U.S. banks in Part-2)

But yes I agree with you wholeheartedly 100%, that U.S. Stocks have been a wonderful place to invest in for a while, because our dollar is so strong. However, I did my buying a while ago, and I’m just finding the prices are creeping up a bit. But yes there’s been a huge and phenomenal opportunities in U.S. Stocks, until recently.  If you do the comparison on some of those stocks, you can pick them up cheaper than the March 2009 lows, in Canadian Dollar terms I mean.

Dividend Ninja:
That’s an interesting thought, I never looked at it that way. It’s like getting a 5% discount isn’t it?

Derek:
Absolutely! I bought more shares of Wal-Mart recently, and it’s cheaper if not similarly priced to what it was two years ago in March 2009. JNJ was cheaper, and a whole bunch of them.

Dividend Ninja:
Derek, I just finished perusing your recent article in Canadian MoneySaver, “Inflation is coming -What’s your best investment.”  You discuss the concept of Pricing Power. Can you elaborate on that point for readers who aren’t familiar with the Jargon? And why would those stocks would be good investments in an inflationary economy?

Derek:
Pricing Power allows you to increase your prices with at least the rate of inflation, preferably even more. So certain products have pricing power and certain products don’t. So again, this comes back to the brand idea to a large extent, or something that people require. So as Warren Buffet describes – something with an economic moat of some sort.

A perfect example is Coca-Cola because it’s a product that really hasn’t changed over time. So if you’ve ever seen those old retro-signs where it says “Drink Coca-Cola 5¢”, well a Coke was $.05 cents. Now a Coke is $1.50, so over the long term they’ve definitely kept up or more than kept up with inflation.

Dividend Ninja:
Absolutely! But if people are going to have less purchasing power with inflation, then why would consumer staples be better stocks?

Derek:
I think over the long term wages tend to keep up with inflation. So people can still buy as many products and services. And the things they buy methodically, they buy if they need it. You don’t really give much thought to getting up and brushing your teeth in the morning, but you do it. If you’re in the supermarket, and you see a tube of toothpaste you recognize that is $1.29 and another brand that is $0.89 cents, people will dig a little deeper and afford the extra $0.40 cents, because their teeth are so important to them.

Dividend Ninja:
That leads me into your latest book “The Idiot Millionaire.” I noticed you shifted your holdings in your Portfolio Update chapter from higher paying dividend stocks and income trusts to larger cap and lower dividend yield companies.

Is part of that due to the recent conversion of Income Trusts into corporations, or just that the big dividend payers are safer? Or are you going for dividend growth instead of higher yield?

Derek:
OK, there’s a couple of factors here. Number one to be as honest as possible was a bad move on my part to a point. At the time I was trying to shift out and shift back into the market at a better price.

But the big thing for me is that when I first stopped working and created my portfolio to stop working 5 or 6 years ago, I needed the dividend income to live. I also needed the higher yielding securities. And of course the income tax rules at that time for Income Trusts. The tax rules for the Income Trusts have changed now. I needed those higher yielding vehicles in order to have a reasonable retirement income, for the Stop Working strategy.

Well now quite honestly, I mean I’ve written five books. They are all best sellers and I’ve made a few bucks dong it. So from a tax perspective it makes a lot more sense for me to be perfectly content with a much lower dividend yield, with more dividend growth over time. That strategy simply makes more sense for investors who have other sources of income.

Dividend Ninja:
So the question is, why bother going for high-yield in the first place? Why not just buy the big dividend blue-chips to begin with? Do you think that would have been a better strategy from the start, and that you would have had more portfolio growth?

Derek:
That’s a really difficult question to answer, because it really depends on what you are trying to accomplish. I’m a lazy guy (laughing) and I wanted to stop working and have the freedom as soon as possible. And that would have not been achievable by buying the companies with lower dividend yield, even though they did have more growth.

Monetarily I’m not sure, because many of the income trusts I bought in the very late 1990’s. If you recall everyone was enamoured with tech stocks at the time. And Nortel’s market capitalization if you can believe was bigger than the major 5 banks in Canada. It was $200 billion dollars or something ridiculous, and people were chasing JDS Uniphase, and there was a whole bunch of the dot-com companies as you know. And during that time you could pick up income trusts for incredibly cheap prices. So I did reasonably well on those.

Dividend Ninja:
That really leads into my next point about Nortel and those kinds of stocks. You are always going to have companies like that in the index. Is that your main reason why you’re not a fan of index investing?

Derek:
That’s a big part of it, of course, because certain companies are going to be over weighted. And especially in the Canadian Index, because we don’t have the same depth as the U.S. market. You know we have financial services, resources like oil and gas, and a splattering of other things. But it’s really tilted in certain industries by doing the indexing, and yah you’ll find the hot companies monopolize the index. I think Nortel at some point was 30% of the index, or something like that, which to me is a complete overweighting obviously.

And the second reason is habit. I tend to be a creature of habit, and I don’t change very quickly. I started buying stocks in my 20’s and that’s what I’ve been doing for 15 or 20 years. You know “ if it’s not  broke don’t fix it.” Buying individual stocks works pretty well for me. So I stick to it :)

. . .

In Part -2 of my interview with Derek, we discussed:  the risks of a 100% equity portfolio, bonds, and the impact of dividend cuts. Derek gives his screening criteria for stocks, and what he learned from the 2008 and 2009 financial crisis.

Don’t forget to read the next half of the interview! Continued in Part-2


Derek Foster’s Books

Derek Foster is the author of five National Bestselling Books:

  • STOP WORKING:Here’s How You Can!
  • The Lazy Investor: Start with $50 and no Investment Knowledge
  • Money for Nothing: And You Stocks for FREE
  • STOP WORKING Too: You Still Can!
  • The Idiot Millionaire

buy now

21 Responses to “Derek Foster Interview – Part 1”

  1. Andrew Hallam

    May 16. 2011

    Great interview Ninja,

    It sounds like Derek has done really well. What line of work was he in before he retired? To retire at such a young age with five kids is remarkable. Well done Derek! I once borrowed money to invest, in the mid 90s. I bought the Dogs of the Dow with $30,000 that I borrowed from my father-in-law, after he took out a line of credit on his apartment…so I could invest the money. Generous of him, wasn’t it? I got lucky as well. And I’m glad I did. That $30,000 was greater than my take-home salary as a teacher on Vancouver Island. And like Derek, I wouldn’t do it again.

  2. Andrew Hallam

    May 16. 2011

    Great interview Ninja,

    It sounds like Derek has done really well. What line of work was he in before he retired? To retire at such a young age with five kids is remarkable. Well done Derek! I once borrowed money to invest, in the mid 90s. I bought the Dogs of the Dow with $30,000 that I borrowed from my father-in-law, after he took out a line of credit on his apartment…so I could invest the money. Generous of him, wasn’t it? I got lucky as well. And I’m glad I did. That $30,000 was greater than my take-home salary as a teacher on Vancouver Island. And like Derek, I wouldn’t do it again.

  3. Sunny

    May 16. 2011

    Great interview! Can’t wait to read the second part.

  4. James

    May 16. 2011

    Andrew,

    I am curious if you did well with your investment and what impact that has had on your current net worth.

    Although I am not advocating borrowing to invest, it seems to have had a major benefit for Dereck and allowed him to accomplish things that wouldn’t have otherwise been able to. Perhaps you are in a similar situation. Both of you have written books due to your net worth.

    Cheers,

    James

  5. Andrew Hallam

    May 16. 2011

    Hey James,

    No, borrowing to invest made me a few dollars, but not many. It was pure luck, for sure, but I turned that borrowed $30,000 into about $50,000. My profit was about $20,000, and then I folded up shop and never borrowed to invest again. That $30,000 was an extraordinary amount of money for me to borrow at the time. It exceeded by annual net income as a school teacher. And without outside help (my father in law’s help) I never would have been able to secure that kind of line of credit in the first place. I didn’t have enough in collateral resources. My investment success came the old fashioned way: I started investing when I was 19; I was cheap; and my salary took on some extra juice when I moved to Asia. I’m 41 today. And I don’t have enough to retire yet, although my passive income from dividends and interest is about $45,000 a year, so it could be done, I suppose.

    For Derek to have retired when he did, he would have needed an extraordinarily large salary (pre-retirement) or some kind of very impressive collateral, in order to borrow enough money to make it worthwhile. I’d love to hear that part of his story, because I have to admit, it would be pretty exciting to live vicariously through it. Which of his books takes you through that part of his story? I haven’t read any of his books, but that one would be a great read. Thanks again for the interview Ninja! It’s always inspiring to read about someone who has done so well.

  6. Dividend Mantra

    May 16. 2011

    Great article, and I’m definitely looking forward to part 2. I know there are a lot of Derek Foster haters out there that think he never could have stayed retired without the book sales, but hey..give a guy credit when credit is due. Good for him!

    Andrew Hallam,

    From my memory, and this is pure memory, Derek never made much money and he traveled pretty extensively. I do remember reading somewhere that he never made over $40,000 CAD. Not chump change, but very middle-class if I’m right. I believe he traveled to Asia and taught ESL. I could be wrong, so please don’t quote me. From my understanding, his margin bet on Altria was a make or break type investment, and it made him. I think living frugally on a middle-class income and maximizing investments monthly can lead to early retirement, as I’ll be living proof of it. But Derek did have a dash of luck, which he certainly isn’t trying to hide or be bashful about. He is honest.

    Thanks Ninja!

  7. Andrew Hallam

    May 16. 2011

    Well done Derek!

    Alluding to Dividend Mantra’s suggestion that Derek has some detractors, I suppose I can respond with this:

    I was once interviewed in that Me & My Money piece for the Globe and Mail, and I was surprised how caustic anonymous people can be. I had investment success, yeah, but that didn’t make me a liar or a bad guy. That was an interesting peak into human nature, and something that Derek has probably experienced.

    I’m more jealous of the guy who lives until he’s 90, while smoking and drinking (while I get cancer at 37, living a clean lifestyle). But I certainly don’t “hate” those guys or moan about them. That’s life. Good for you Derek! And I hope you keep selling plenty of books, and keep smiling, while living a long, healthy life.

  8. The Dividend Ninja

    May 16. 2011

    @Dividend Mantra @Sunny

    My pleasure! I really enjoyed interviewing Derek, he was very open and candid, and all questions were fair game. The bottom line is all investors make mistakes at some point, and hit lucky streaks as well. You guys will really enjoy Part-2 :)

    @Andrew
    I hear you about the Me & Money piece. I sure noticed a lot of nasty comments towards people in that column LOL.

  9. James

    May 16. 2011

    Andrew,

    Thanks for the reply. Just to clarify, I wasn’t trying to take anything away from Derek for his accomplishments. I was just curious the impact that his and your margin bets/borrowing to invest had on your porfolios.

    A friend of mine passed me a few of his books beofore I had any investments and they did a good job of inspiring me to become more frugal. The books, although very simple, read like candy. However, luckily I am a naturally skeptical person and took his story with a gain of salt and used a couple fincial calculators before setting off on any journey.

    If there is any criticism of Derek, it is that he makes it seem to easy and he was not clear about the details of his journey.

    Anyway, I look forward to reading your book Andrew and I appreciate the reply. Good luck on your journey.

    James

  10. Andrew Hallam

    May 16. 2011

    I knew you weren’t trying to take anything away from Derek, James. No worries on that front.

    Take care,

    Andrew

    Oh, and thanks for the interest in my book!

  11. Michel

    May 17. 2011

    Will Derek talk about his selling during the 08-09 crash? Was he able to get back in, before the end of it? I know he got a lot of flac about it.

  12. Derek Foster

    May 18. 2011

    Hey guys,

    Sorry, I’ve been busy the last couple of days, so I’d like to “drop in”…

    There are two really big factors to me being able to retire so young…

    First, I am incredibly frugal. By this I mean we are North America are incredibly wasteful. I prioritize free time over useless trinkets. I will spend when it makes sense, but for example, I STILL don’t own a cell phone – because I don’t need one…

    Second, investing in the 90s was GREAT and I also used leverage to a point (although I am VERY conservative in this regard now). My “big bet” that everyone refers to was explained in detail in an interview I had with Moneysense Magazine about 5-6 years ago – with Phillip Morris (which became Altria).

    This was a VERY rare opportunity, but the tobacco industry had lost their first case EVER to a sick smoker and everyone was worried about the implications and the stocks got HAMMERED. But with consumer companies (not tech stocks), it is VERY rare for the market leader to lose their top spot. I mean Pepsi has been taking a run at Coke for decades to no avail…but with Tobacco, Phillip Morris (Marlboro) took the top spot from RJ Reynolds (Winston, Camel) in the early 1980s. With cigarettes, people usually start in their teens and stick to one brand – so this was HUGE. The Surgeon General Warning came out in the 1960s – when Marlboro’s market share was quite low, but this warning greatly reduced the potential liability to tobacco companies as the warning was right on the pack. So Philip Morris had MUCH younger customers who had less argument for going to court (as the warning was on the pack) and the market share was growing by leaps and bounds (also internationally) while companies were increasing prices yearly and boosting profits massively while the stock traded at a P/E of around 10-11 with an almost 6% GROWING dividend.

    I had 60K net worth at the time (I was 25) and I borrowed on margin and bought almost 200K in stock (stupid in hindsight). But once the market digested all the facts, the stock rose 30% within 6 months or so, and I cashed out with my net worth having doubled…

    I also used leverage (although much more sparingly) in the late 1990s when everyone wanted hi-tech companies and income trusts (pipelines and electricity) and REITS were paying 10-13%. I did not take a rocket scientist to understand that borrowing at 7% and earning over 10% (tax-advantaged) was a good deal. The incredible rise of prices after hi-tech imploded was icing on the cake…

    I am not a huge fan of margin borrowing now (because of risks), but I evolved over time. If I would have invested like I do now, I would not have reached the same point quite so quickly, but I also would have avoided some other stupid moves I made…so perhaps I would have stopped working at 38 or 40 instead of 34…but that again is also because I am pretty frugal…

    If anyone has any more questions….feel free.

    Cheers,
    Derek Foster (The Idiot Millionaire)

  13. The Dividend Ninja

    May 18. 2011

    @Derek Foster
    Thanx for posting :)

    @James
    Thanx for contributing to the discussion.

    @Michel
    Yes, I asked Derek about this in the second half of the interview. He explains it in detail.

  14. My Own Advisor

    May 18. 2011

    Great interview Ninja!

    Derek, great stuff. I think you’ve found a new passion and hobby, making the rounds of the Canadian blogosphere and getting interviewed by bloggers!

    “I’m not a very smart guy, so I look for simple things, something I can understand.”

    I dunno about that one. You’re pretty modest – which is good, but I wouldn’t take it that far :) I’d like to believe you are smart enough to a) save and invest like few others can and b) invest very wisely and make many decisions few others could. You don’t get to where you are, as an investor, without some luck but also some great know-how.

    You and Mr. Hallam have alot in common in that regard :)

    While I’ve heard it before, even from my interview with you in fact, I continue to enjoy reading about your take on recession-proof companies like Coca-Cola. It just makes sense – to invest in these types of companies. You never let these companies go so long as dividends are paid and are increasing over time. Nothing not to love there.

    Continued success with the books, speaking engagements and any other investing endeavours Derek. Hope to catch up with you later this summer.

    Ninja, looking forward to Post #2! :)

    Mark

  15. Nice interview Ninja! I like the comment “ if it’s not broke don’t fix it.”. It’s important to know your limit and understand what defines your satisfaction in investing.

    Looking forward to part 2.

  16. Dividend Mantra

    May 18. 2011

    Derek,

    Great comments! I appreciate and applaud your frugality. I’m also a very frugal investor and invest at least 50% of my net income every month, and shooting for 70% within three years. I also live without a cell phone, without cable television, and am eventually going to live car-free. Your explanation was crystal clear in exactly what you did, how you did it, and why you did it…and why it wouldn’t apply today. Thanks again for your contribution to the community. Good luck with your continued successes! Take care.

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