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- How Has Covid-19 Affected Your FIRE Journey? Part 1 - May 11, 2020
Today I am ridiculously excited to be talking to Derek Foster, National best-selling author of 6 books including The Idiot Millionaire, The Lazy Investor, and Money for Nothing. His claim to fame was being the youngest retiree in Canada when he retired at the age of 34.
Now for some reason, people seem to think we’re rivals or something, what with the whole “Youngest Retiree” thing. In reality, Derek is one of my personal heroes and reading The Idiot Millionaire many years ago was a big inspiration for doing this myself. So when Derek contacted me out of the blue, I couldn’t not invite him for an interview. And being the class act that he is, he said yes.
Derek, thanks for being here.
First of all, let me just say I’m a huge fan of yours. Your books was probably the first time I had come across the idea of using stocks to generate passive income, and it sparked my interest in investing. Where did that idea come from?
I was interested in passive income from the age of 7 or so. I discovered the game Monopoly and quickly realized that owning properties made so much more sense than working for a living or “Passing Go”. Then in my early teens I developed an interest in the stock market and a few years later read a book called, The Wealthy Barber. Later I learned about Warren Buffett and it all sort of came together.
When did you realize you could use your strategy to retire?
I had been investing for a few years and my portfolio had been growing – but the interesting thing was that every year the dividends grew too. I had a string of crappy jobs, so having a passive income stream really held appeal for me….so I realized that with every dividend increase and every new stock purchase that I was getting closer and closer to the point where I would no longer have to work for money. And then I did research and found companies that had increased their dividends for decades and I could look back and see how the dividends had grown over time. For example, Colgate has been paying dividends since 1895 – that’s well over 100 years! BUT you also have to realize that it has increased its dividend for over 50 years! And as long as we all keep brushing our teeth (let’s hope so), it will keep paying those ever-increasing dividends.
What prompted your decision to leave? For me, it was because I hated my job. Was it something similar for you?
Yes! I think a BIG difference in our journeys is that you had a job you did not like, but I believe the pay must have been pretty good. I never had a good-paying job. I travelled a fair bit in my 20s before I retired and funded that with a series of low-paying retail jobs. I backpacked around Europe for a summer and spent a year living and working in Australia and New Zealand. Then I moved to Vancouver for a spell, then headed to Asia to teach English. Anyhow, I reached the conclusion that life is really too short to be doing something you don’t enjoy (especially when it didn’t even pay well). I mean for a time in Vancouver, I was a telemarketer – talk about a crappy job…
Jeez, I thought I had a non-standard career path.
OK but I’m curious about something. When I left, I had people like you to look to and say “Well, he retired and it worked out for him.” But you didn’t have that. What was it like to pull the trigger? And how did you climb your wall of fear that you weren’t making a terrible mistake?
Again, I think your skill set offered you a better earning potential than I had achieved. The only “career” job I was offered was to be an auditor for Revenue Canada (as I majored in accounting – YAWN), but I did NOT want to do that. So I headed to Korea to teach English for a second time. This was one job I did truly enjoy. I got a job at a university and the pay was not great but I had 16 weeks vacation/year and I only worked 20-hour weeks. And my students were AWESOME! But really, English was not going anywhere, so if it did not work out after my wife and I returned to Canada, I guess we would have gone back to Korea again – so not really a huge risk – only a potential for a little ego bruising, I suppose. In Canada, these decisions are blown all out of proportion. I mean these are pretty first-world problems. We’re not going to starve in Canada. If you look at people like the pioneers who settled in parts of the country, THAT took much more courage, imo.
What about your family? Did they support your decision or did they think you were crazy?
I have always been a little “out there”. For a number of years I kept coming home and working lower-paying retail jobs, then leaving again to travel to somewhere else. They had pretty much given up on me by that point, so no big pushback really. The key is to lower family expectations very early, so it’s not hard to meet the diminished expectations as you grow up, lol! I have always gone my own way. Back in high school, my friends and I watched Back to the Future (am I dating myself here?) and there was a character who became mayor. Right there I decided to run for city council. I had no chance of actually winning, but I thought I did – and I managed a pretty good showing. But how many people can say that the first time they legally were allowed to vote, that they voted for themselves? So I started going my own way early on and my family got used to it.
Wow, OK you were way out there a lot earlier than me. I guess I acted too “normal” right up until the point I retired. I should have let the crazy out earlier. That’s some master-class level stuff right there.
Let’s shift gears a bit and talk about investing. You advocate buying quality companies, holding them forever, and living off the dividends. Why?
Because there is a long history of that strategy working. By focusing on dividend stocks, you are automatically screening out a lot of the “crap” that is offered by the stock markets. Add in a higher hurdle by looking for companies that regularly INCREASE their dividends, and you are really zeroing in on quality companies. Now the “never” selling part was a point I was trying to drive home because most people think stocks should be bought and sold and moved around like poker chips at a casino. I was trying to stress that simply collecting dividends would work out great. There are times when you might sell (if you made a mistake when you bought or if the business has changed) but generally buying and holding is the best path to follow.
The problem I’ve always had with Dividend Investing is that it creates a sector risk. Not only does your portfolio become mostly Canadian, but it also crowds your holdings into finance, telecom, and energy. How did you address this?
Our paths are similar, but this is one area where we disagree. First off, there is nothing that forces you to be mostly Canadian unless you are focusing on the dividend tax credit issue which I’ve discussed in my books. But then there is no withholding taxes on US dividends if you have them in your RRSP, and UK stocks attract NO dividend withholding taxes… Even if you do focus on Canada, I would add REITs to the above list. And with energy you have pipeline, utilities and perhaps integrated oil (really only Suncor pays anything) so that’s a little more varied. When I wrote STOP WORKING: Here’s How You Can over ten years I also included a Canadian tobacco company (Rothmans) which has since been bought out and also Corby Distilleries (which has changed ownership and I am no longer a fan of) so there were a few other options when I started. There was also some business income trusts, but the tax rules changed on those in 2011. Today one might look at a company like Restaurant Brands (owner of Tim Hortons) which just basically doubled their dividend. I’ve also told readers to look to US stocks for added diversification in consumer staples such as Pepsi, General Mills, or Colgate, etc. Canada does offer some great dividend-payers and the US market can be used to diversify things a little more…with very good growth histories. Once these investments are in place, your income passively grows every year…
What’s the dividend yield target that you consider a stock tempting enough to pick up? And is there an additional process of screening each stock before you decide to buy?
Originally, when I was looking to leave the rat race as early as possible, I bought a lot of higher yielding income trusts, but tax laws have changed that. I bought a lot of them when everyone was chasing internet stocks back in the late 1990s. At that time, it was not uncommon to find investments yielding 10% as most of the market was focusing on high growth “dot-com” stocks (at that time). Now my portfolio has grown quite a bit since then, so I actually don’t want stocks with too high a yield (outside of registered accounts), because it just increases the tax bill. So I own non-dividend stocks such as Berkshire Hathaway and Markel as well as some lower yielders such as Visa, Couche-Tard, CN Rail, etc. I don’t buy tech stocks as I don’t understand them (this is one area I might buy an ETF in the future).
What’s the overall yield you target for your portfolio?
Again, my income is high enough – in fact I found I was re-investing some of my dividends every year so I migrated more towards growing stocks (as mentioned above). My registered accounts (RRSP, TFSA) offer a much higher yield as it is there I hold stocks like BCE, TransCanada, banks, etc. In my non-registered accounts, I hold a lot of the lower yielders. Portfolio yield is probably around 3% or so.
OK, I know this is a delicate topic for you, but I’ve wanted to ask you this question for a long time. During 2008, you went against your own philosophy and sold your entire portfolio at the bottom of the market. What happened?
Stupidity mixed with a little overconfidence, I suppose. I actually sold in February of 2009 and the market fell another 20% after I sold – so that looked like a genius move for a short time. But then it rebounded sharply and I did not get to buy some stocks I wanted to – so that part was humbling. I lucked out in the sense that I had converted my money to Canadian dollars as ground zero of the problem was the US housing market and was able to buy US stocks with the Loonie at par the following few years – very cheaply. In hindsight, it all worked out REALLY well for me, but to be fair, this was not from any intelligence on my part…
What is less reported in the media is that you bought back in soon afterwards, correct? How did you know when to do that? And did you lose money?
By following too strict a “buy and hold” approach, I gradually increased risk in my portfolio, which created the problem in the first place. For example, I bought a company called “Canadian Oil Sands” at a pre-split price of $8. Over the next few years as oil prices climbed above $100/barrel, the dividends doubled, then doubled again – and the stock price soared to over $50! I never sold a single share – buy and hold and all that. At one point, this single holding made up over 35% of my portfolio! Buy and hold should have been “buy and trim” if things turn out really well. From over $50, the stock dropped precipitously. That`s when I sold it – at around $20 in 2009. With the dividends I had collected and the stock price gain (up 150% or so during the time I owned it), this had been a great investment. But it would have been so much better had I sold some near the top at over $50/share! I think the same sort of thing happened to Nortel investors in 1999 when that stock made up over 30% of our Canadian market (which is one of the things I don’t like about indexing Canada). But I always want to be owning stocks – that had not changed in 2008/09, so I got back into the market soon after (as stated above). But now I am a little more proactive with trimming positions of winners. I try not to have any holding become more than 5% of my portfolio.
Incidentally, I first heard about the 2008 incident from The Toronto Star running an article about you. How did The Toronto Star even find out that you sold off your portfolio in the first place?
I think a reporter asked me what I was doing with the market crash so I told them. After I wrote my first book, I proactively contacted the media with my story, so I had built up some relationships and we spoke from time to time. (I was always too stupid and lazy to do up a great blog like yours – I`m not really all that tech saavy)…
And finally, people keep telling me that if I have kids my retirement plan would blow up because kids are so expensive. You had EIGHT kids after you retired. How did that affect your retirement plan, and how did you keep your kid costs under control?
SOME people will always tell you something is going to happen to derail your plans. In fact, I hate to say this, but for some reason, there are some people who will want to see you fail. They will try relentlessly to attack what you’re doing – saying your plan won’t work because of kids, or for some other reason. Or else they will say you were only lucky and your strategy is not repeatable. Or they will say you should work and “contribute” more to society – or something along those lines… by not working, you are being selfish or something. MOST people will look at what you did and then see if any of it can help them with their own financial freedom journey. But sadly there are others who only want to tear down what you’ve done – out of envy or whatever. I’ve had my share of detractors (and if you haven’t yet, I assume you will to). Some will even spread lies about you. For example, I remember people emailing me telling me that I was not actually “retired” because apparently my wife was a full-time teacher and I just stayed home and lived off her income. This was all totally untrue, but a lot of people believe anything they see on the net, so for a few years after that, this same question would come up again and again. But THE VAST MAJORITY of people are NOT like this…
Ahh the Internet Retirement Police. Love those guys!
So what’s your portfolio size now and how much income does it generate? Before your answer, I know not everyone is out in the open with their numbers, so feel free to plead the 5th on this if you don’t feel comfortable answering.
It’s grown since I retired and provides enough (growing) income in perpetuity to live a comfortable, middle class (yet frugal) lifestyle for myself and my family (ten people overall). Not trying to sound like a politician, but I don’t get into personal numbers for many reasons. My family lives in a reasonable suburban house in Ottawa with a hot tub and swimming pool. Our vehicles are not fancy – a Yukon XL SUV (we need the space) and a Buick. An example of frugality is we had only one vehicle for a long time, but now my kids are beginning to drive and an extra car made sense. So I researched it (I don’t know a lot about cars), and found Buicks (which are known to be “old man cars”) to offer 5-star crash test ratings, great dependability and comfort. Since older people tend to buy them, there is a limited after-market. The car I got last year was 6 years old, but in mint condition. It sold for around $45K new, I paid $7K…
What are you up to these days? Any cool projects you’re working on that you’d like to talk about?
I’m an investing geek, so I still like investing – it’s a passion, I mean I enjoy reading annual reports (and some people might think THEY are boring). My family is a priority, so that is where a lot of my time and attention is spent these days. I am also looking at larger questions of life (so philosophical), and trying to find a way where I can give back in some way…but again, the family takes up a lot of time.
Any pearls of wisdom from someone who’s been early-retired a heck of a lot longer than I have?
Life really is short, so do what you want to do regardless of what your parents, peers, friends, or random people on the internet think. If you can avoid getting excited about future landfill crap (the next Iphone model, gizmo or whatever), you WILL save money. INVEST it, don’t just SAVE IT! If you invest it well (not risky things with no track record, but quality stocks… or low-cost index funds or ETFs) the odds really are STACKED IN YOUR FAVOUR OVER TIME! Your income will automatically increase as your dividends increase – without any effort on your part. Then your net worth follows over time – automatically. You WILL make mistakes. Try to learn from them (I seem to need to repeat them a number of times before they sink in, but you’re probably smarter than I am). Regardless, over time you don’t have to be that smart to retire early and live well…Oh, and perhaps don’t have 8 kids – they can be expensive!
Hey man, you did it to yourself.
Derek, this was a huge pleasure to talk to you, thanks for stopping by and thanks for being (one of) Canada’s youngest retirees.
When not producing more kids, Derek can be found at StopWorking.ca
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