“Isn’t there a problem selling snake oil as vitamin tonic?”
— Jon Stewart to Jim Cramer, March 12, 2009

Despite misgivings on whether dividend growth will be as rosy as recently experienced, there was nothing fundamentally dangerous in Derek “Canada’s-Youngest-Retiree” Foster’s first two books (review of Stop Working and The Lazy Investor). With his new book though, the author is treading on dangerous ground with options and leverage, the risks of which the author seems to underestimate and which could land even experienced investors in a heap of trouble. It is disconcerting to think that relatively novice investors might be buying into this snake oil.

A large portion of the book is devoted to explaining how writing puts can earn “free” money. I’ve already posted why a strategy of writing puts isn’t without any risks. But Derek doesn’t stop there. Another “money for nothing” strategy suggested is leveraging to invest in income-producing securities. The distributions should cover the interest payments on the loan and after some years of rosy distribution increases, the income trust can be owned free and clear. If only investing were so easy! The book does carry warnings about the risks of leverage but claims that the risks can be reduced:

With my strategy, I focus on the highest quality companies that have been in business for decades — or even over a century in many cases. I further reduce risk by focusing on companies that offer recession-proof products or services. To add diversification and reduce risk even more, I invest in a number of companies from a variety of different industries.

The interesting parts of the book (at least for me) are the ones in which Derek talks about his own investments. It turns out his early retirement was achieved through a generous dose of leverage. And we’re not just talking about his all-or-nothing bet on Philip Morris:

In 1999, I borrowed money at 8.5% and invested it into Riocan. I paid $9 per unit and the distribution at that time was $1.04 per share. So the before-tax income from this investment was:
($1.04 dividend by $9) = 11.55%
So by borrowing at 8.5% and earning 11.5%, I was making free money using other people’s money (the bank’s money–which is how they usually make money).

It makes me wonder: how much of the Derek Foster story was achieved through unrepeatable, high-risk gambles and not through the sensible strategies advocated in the first two books?

Other reviews of the book:
Four Pillars
Michael James on Money

This article has 25 comments

  1. Thanks for the mention! Stewart’s interview with Cramer was terrific (I loved the clips that showed him contradicting everything he was saying in the interview)…

  2. RISK….that’s all I have to say to any investor attempting to use Foster as an authority on investing and planning on utilizing his strategies in their portfolio.

    He’ll never acknowledge how much he lost, but will be the first to show everyone what he’s gained. Take him for what he is: a great marketer.

    What he is not is an advocate for sensible investing and likely very damaging to investor education that many of us strive to teach those who are eager to learn.

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  4. “Money for free” yeah right. As long as those suckers buy the book and who care whether they buy what is said inside, it is a free ride to the bank.

  5. Canadian Capitalist

    Brad: If rewards were all there is to investing, everyone would be Warren Buffett. Perhaps it is time to file the three books under “Finance: Fiction”.

  6. Free money? What happens if the share price falls or the dividend gets cut?

    I see leveraged investing as a matter of risk tolerance. I’m a conservative investor. The idea of borrowing money to buy stocks isn’t something I’m comfortable with.

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  8. Globeadvisor “Mr. Foster’s books don’t just sell investment advice; they sell a dream of financial freedom.” like CC has said many times it’s Fiction he is selling in his books. Only if things were as easy as Foster makes them look like.

  9. “With my strategy, I focus on the highest quality companies that have been in business for decades — or even over a century in many cases.”

    For example: AIG, Lehman Brothers, General Electric, and Citigroup!

  10. Thanks for the link. I still think his first book is pretty good for the frugal tips if nothing else but I skimmed the second one and didn’t bother with the third.

  11. Thanks for the mention. It’s good to see a blogger take the gloves off in a book review. I’m suspicious of anyone who only gives positive reviews.

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  13. I for one enjoyed his books. Invest in solid companies that have a tendency to increase their dividends. Certainly nothing wrong with this strategy. If you want to invest in equities, for the small time investor, starting a DRIP portfolio with some of the biggest Canadian companies around seems like some pretty solid advice. Options, are intriguing, but not for the faint of heart or novice, but nonetheless it could be used as an important tool for managing your portfolio. I viewed DF books as a starting point for further research. After reading the first book, I researched the importance of dividends in overall returns. After the second, I looked up more information on DRIPS, especially DPP offerred directly from US companies. And after the third, I wanted to learn more about options.

    Although DF jumped ship, I do not believe that this invalidates the strategies proposed in his books.

  14. I guess if some of the basic premises are flawed, the presentation is one-sided, and the author has bailed on his own strategies, then saying ‘at least it got me interested’ is not saying much at all.

  15. When a boatload of people adopt dangerous, anything but prudent, strategies, a few must succeed. Probabilities tell us that. But for the successful few to dare write books to ‘teach their methods’ – that’s irresponsibility (ok, it’s greed) and there is no punishment good enough.

    As an options professional, I know how badly the industry has been harmed by those who speak of free money and instant wealth.

    Options reduce risk and moist investors can benefit from using conservative strategies. But how would anyone know that when the Fosters of this world give options a bad name?

    Mark
    http://blog.mdwoptions.com/options_for_rookies/

  16. Can we let go of the Derek Foster thing from now on? He got lucky and will be remembered as only being a blip on the personal finance radar screen, five years from now.

  17. Nobleea,
    I agree. CC, I think you’ve made your point. This Foster witch hunt is getting a little boring.

  18. I was about to pipe up and say the same thing…this guy has been villified enough. It sounds like everyone here is in a different class, and by that I mean just that much smarter and resourceful.

  19. Canadian Capitalist

    noblea, Ahmed, Matt: Point taken. This is my last post on DF for a long while, I promise 🙂

  20. Derek Foster deserves the beat down and condemnation. Sure everyone here knows the inherent risks in options trading (or divideng investing), but his target audience doesn’t. The way he plays down the risks of his strategies to novice investors is downright unethical.

    But if those novice investors ever google his name and threads like these show up, it would be a big win for them.

    So the more condemnation the better!

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  22. Wow, I can’t believe this guy has packed such a whole load of crap in one book. I have no idea who this guy is, but makes me real suspicious that he retired just by making money off stocks.

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  24. Daniel : “Derek Foster deserves the beat down and condemnation. Sure everyone here knows the inherent risks in options trading (or divideng investing), but his target audience doesn’t. The way he plays down the risks of his strategies to novice investors is downright unethical.”

    I agree, let the beatdown continue..

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