Thursday, January 19, 2006

Derek Foster's "Stop Working"

Buy Stop Working NowI've recently finished reading Derek Foster's "Stop Working", a personal finance autobiographic account from Canada's self-proclaimed youngest retiree. As I'm pretty sure Foster's investment approach is fairly well-known, and as others have already provided helpful reviews of his book (see Canadian Capitalist's synopsis as an example), I won't go into a lot of detail. I mention his book here really for a couple of specific reasons:

1. His strategy of buying and holding (forever), recession-resilient, industry-dominant equities with a demonstrable history of maintaining and increasing dividend payments is one that I will (hopefully) begin to implement when I weigh my first transaction later this month. Among other factors, I will evaluate possible purchases with the criteria he outlines in his book.

2. I appreciate Foster as an agitator, which I mean in a very positive way. As an indication of this, the largest discussion thread ever recorded on MoneySense.ca's forums (320 posts at last count) was a topic that began, innocently enough, under the heading "The book "Stop Working" by Derek Foster" with the inquirer simply asking about any risks to this strategy. Foster himself became part of the online discussion, taking advantage of the forum to really clarify how, contrary to the model promoted nearly universally, his approach is not predicated upon the size of the nest egg. (Speaking firsthand, as part of the process of recently joining my company RSP plan, I indeed went through a 'retirement workbook' that quite clearly dictated exactly how much I needed at retirement (the nest egg) in order to stave off abject poverty.) Also, a good part of the discussion focused on financial models comparing Foster's approach and RRSP investing. Though it frequently became argumentative, I did learn a lot from these exchanges.

In short, whether one agrees with his strategy or not, I think Foster has been very effective (in some circles) at challenging assumptions and making people double-check and think hard, if not passionately, about their retirement plans, be them of the 'early' variety or otherwise.

6 Comments:

Anonymous 0xCC said...

I read that book last spring (I actually had to wait about 3 months in order to get it from the library, it was that popular) and I have started to implement changes to my portfolio ever since. Before I read the book I had already been investing in dividend-paying stocks but I didn't really think about the longer-term impact of both the diviend payouts and *increasing* dividends.

Since reading the book one of the things that I have looked at when considering a stock to purchase is the dividend growth over the last 5-10 years. There are a number of high-quality Canadian companies that have increased their dividends 10-15% per year (on average) over the last 5-10 years. If you keep an eye on these kinds of stocks (most of the Canadian banks are a good example) you can buy them when the market doesn't like them and when they are very cheap. Even though they might only pay out 2-4% today, in 5 years your original investment might be paying you 10-15% per year. It is a little bit of a strange concept to get your head around because in 5 years the value of the stocks will also have risen and from a market value standpoint it will still be paying 2-4%, from a book value standpoint they could be paying 10-15%. (Book value is the amount you paid for the investment, now how much you could sell it for).

1/20/2006 8:28 AM  
Anonymous Canadian Capitalist said...

You might want to check out Derek's comments to this post on my blog.

My personal opinion: Dividend growth investing is a great strategy. That said, there is a bit of fallacy in Derek's calculation. The yield on the S&P TSX is 2.4% (when income trusts are included). Let's say you are able to achieve a portfolio yield of 5%. For an annual income of $30K (pre-tax) you need a portfolio of $600K. To live on $30K, you have to assume that your house is paid for (add another $250K). You need a total capital of $850K.

1/20/2006 9:03 AM  
Blogger Humble Investor said...

Oxcc - thanks for the feedback. The compounding effect of dividend increases you well describe is something I am looking forward to indded.

1/20/2006 10:16 AM  
Blogger Humble Investor said...

Thanks CC,

As much as I am planning on using Foster's strategy in selecting stocks to buy and hold, I fully agree with you. I don't expect my stated financial goals to enable me to retire, rather to make things easier and possibly provide the opportunity to shift into less demanding work as passive income hopefully increases.

Personally, I also diverge slightly from Foster's strategy as I'm not as opposed to RRSP investing and am planning on taking advantage of my employer RRSP program as a contribution source.

Again, thanks for the insightful feedback.

1/20/2006 10:28 AM  
Anonymous Anonymous said...

I think Canadian Capitalist may have missed part of the point that Mr. Foster was trying to make. If you look at the market (or even an individual stock) today, yes the yield is in the 2.4% range and you would need your yearly expenses divided by 2.4% in invested capital in order to cover your expenses. However, if you think longer-term what is the growth rate of that yield? If we say it is 10% (and you can find individual companies with dividend growth rates much higher than that) then every 7 years the yield on your original investment doubles.

Let's say you put $1000 in the market today and get a 2.4% yield. Lets say that the growth rate of dividends is 10%. So this year you would expect to get $24 in dividends. In 2013 though (7 years from now) you should expect to get $48. If you have re-invested those dividends along the way your yield (on your original investmet) would be much higher than the 4.8% I have calculated.

Like Mr. Foster mentioned in the comments to your post, this isn't an overnight solution. If you take a long-term view and wait for the right opportunities to pick up good companies with a strong history of increasing dividends you can generate enough yield (dividend, interest and income trust distributions) to live on. Not having to pay the CPP, EI and other 'working' expenses should help lower your income requirements as well.

I am currently 33. I have been investing on my own for 3-4 years and have a portfolio that currently generates about a 4.8% yield for 2006 (based on the market value of my portfolio at the beginning of this year and assuming no dividend increases over the year). I have a plan to have my house paid off in the next 5-7 years and at the same time increase my investments so they are returning enough to cover the majority of my living expenses. I hope to be truly financially independant in 10-12 years (I think that's really what Mr. Foster is, I don't think he is really 'retired'. He does what he wants but he is still earning active income by writing the book, writing articles in Canadian Money Saver, maybe doing some speaking engagements, etc...)

1/20/2006 11:15 AM  
Anonymous 0xcc said...

Oops, that last comment by "Anonymous" was actually me...

Another point I wanted to mention was that Canadian Capitalist does make a valid point. Your portfolio might always give you a current yield of 2-4% but that isn't how Mr. Foster is looking at it. Mr. Foster looks at it from the point of view of 'how much money do you have to put into your portfolio', not the 'how much is your portfolio worth today' point of view. There might be some years where your portfolio yields 8% and some where it yields only 2%. The point is that if you are only concered about the actual cash that your portfolio pays out you don't need to focus on how big your nest egg is, you just need to focus on the cash payout and how to buy stocks that will maximize that payout over the long-run.

1/20/2006 11:46 AM  

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Disclaimer: These articles are for information only, and are not to be construed as financial advice, legal advice, or a solicitation to buy or sell securities.