As Derek Foster (DF) is pretty well known in the finance space here in Canada, while reviewing his latest book The Idiot Millionaire, I thought it would be a good opportunity to snag an interview with him. My telephone conversation with Mr. Foster was casual, informative and entertaining.
It turns out that my financial path is fairly similar with DF’s. He is a millionaire in his early 40’s but indicated that he had a similar net worth at my age with similar frugal tendencies. What was my impression of Derek Foster? Although he is smart, knows his stuff, and very willing to speak about any financial topic, he has sincere humbleness about him. He readily admits when he is wrong, but still doesn’t fear putting himself out there when explaining what he believes in. We chatted for over an hour and kept things informal, but I managed to come up with some financial questions.
For those of you who don’t know who Derek Foster is, here is the short version:
Derek Foster is known as Canada’s Youngest Retiree when he retired at the young age of 34. How did he do this? Through starting young and sticking with his investment plan of buying strong dividend paying stocks. He feels very strongly about his strategy and rightly so as he has achieved great success. His first book Stop Working: Here’s How You Can is a Canadian Best Seller.
Foster currently lives off and supports his family through dividend distributions, book sales and speaking engagements. Note that he retired before publishing his first book. You can read more about him in my book review of Stop Working: Here’s How You Can.
Best Financial Move
Back in his earlier books, DF mentions about his big bet on Philip Morris, a Tobacco company. As he does a lot of research on each of his stocks, he was convinced that the stock was oversold. He was so certain of this that he went all-in via leveraging. In hindsight, DF admits that it was an extremely risky move, but the end result was that it doubled his net worth. Another big bet that has paid off was his investment in Canadian Oil Sands. In 2002/2003 when oil was low, DF noticed some coverage on the peak oil theory, recognized that oil was cheap and bought into COS when it was a relatively small company.
Worst Financial Move
DF admits that one of his worst financial moves was cashing out in early 2009, about a month before the market bottom in March 2009. However, fortunately for him, he jumped back into the market at the right time to minimize the damage. His latest book goes into the positions he bought back into along with the damage (or lack thereof) to his portfolio. Without disclosing too much of the contents of the book, his portfolio really came out relatively unscathed due to continuing to sell put options (see next question) and pocketing the premiums, being able to buy US stocks with a strong CAD, and only re-buying companies that were cheap.
Selling Puts Now?
In DF’s book “Money for Nothing”, Derek promotes the put option selling strategy. In a nutshell, selling put options is a way to buy stocks at a particular price which is the opposite of selling covered calls. The investor who sells the put option collects a premium for doing so with no guarantee that the buy/strike price will be hit. As mentioned above, DF is still selling puts on mostly US companies.
In DF’s first book, he mentions that RRSP’s may not be the best tool for everyone – and I agree. So I had to ask his thoughts on RRSP‘s and TFSA‘s now. While he still believes that low income earners should generally avoid RRSPs, he has high praise for the TFSA. For DF, he keeps most of his investments in a non-registered account, but is utilizing the TFSA as well.
Favorite credit card?
As I’m a frugal guy who loves to collect reward points, I was interested in comparing my wallet to the credit cards that DF uses. As I’ve come to discover, DF likes to keep things simple. He uses the PC Mastercard as his primary card, Petro Canada for gas, and the TD Gold card for business and free roadside assistance.
Favorite Discount Broker?
DF uses TD Waterhouse along with the majority of his banking. As DF likes to simplify things, he’d prefer to pay the extra few dollars in commissions (compared to Questrade) if it means that everything is kept in one place.
Current Investment Strategy?
Although DF is known for buying dividend growth stocks mixed in with income trusts for their higher distributions, his investment strategy has recently shifted a little. When he first retired, his dividend portfolio was his primary source of income, thus extremely tax efficient. However, with the business income from selling books and paid speaking engagements, the non-registered dividend stream isn’t as efficient. As such, DF still sticks with strong dividend stocks, but ones with slightly lower yields that have a history of buying back stock.
Plans for the future?
On a personal level, DF and family really enjoy extended road trips and hope to continue with their adventures (he has the time, why not!) From an investment perspective, DF plans to continue selling put options and buying quality stocks at reasonable prices.
Words of Wisdom?
DF strongly believes in focusing on quality stocks with strong brands and to keep it simple. For financial success, DF recommends to:
- Avoid the fees
- Eliminate garbage stocks, focus on the quality when they are at a fair price.
Derek also offers a free monthly newsletter, if you’re interested, you can sign up on his website stopworking.ca.
Questions for Derek Foster?
Mr. Foster has agreed to answer reader questions, so here’s your chance! Please place your questions in the comments (here) and DF will be around to answer.