Ellen Roseman of The Toronto Star reveals in her column today that Derek Foster of buy-dividend-stocks-and-hold-forever fame is not holding up very well in the face of market turmoil:

In early February, he sold everything he owned in his online brokerage account – $472,000 worth of stocks and income trusts – and moved into cash.

“I think we’re in for more pain,” he says when explaining his abrupt about-face.

“My strategy was to buy quality dividend-paying stocks and hold them through thick and thin.”

“I held on all last year, but I’ve been doing lots of research and I don’t think we’re close to the bottom yet.”

I’m just guessing here but I believe Derek is now feverishly working on a new book on timing the markets.

Update: John Heinzl called out Derek Foster on his do-as-I-say-not-as-I-do attitude in The Globe & Mail in a column titled “Buy-and-hold champion sells everything”. He asked some tough questions including this one:

Your first book, Stop Working, preached the buy and hold, dividend-investing philosophy. Selling all your stocks is a repudiation of that. So will you stop selling that book?

A: Absolutely not. Because I think this is a temporary thing. … My total goal in this is to absolutely get back into stocks, but I want to get back into stocks when the yields are up and it’s going to be a wonderful time to buy, when all the excesses have been wrung out of the system.

This article has 39 comments

  1. I believe Derek is now feverishly working on a new book on timing the markets.

    Haha. I’m planning to post about this (and dividend investing in general) next week.

  2. I’d like to play devil’s avocado here, if Derek Foster is putting all his money in cash I think we should freek-the-geek out. Withdraw all your money and hide it in your mattress.

    Shouldn’t he just be reinvesting those dividends for those 10% yields?

  3. This is interesting. I guess it’s a good thing he’s got income coming in from his books because I doubt he’d be able to survive on his portfolio alone.

  4. Good job calling him on it. It’s very easy to “buy-dividend-stocks-and-hold-forever” when the market is going up. Turns out, when it’s going down, and your money is on the line, it’s a different ball game.

    As we speak, I wonder how many people are trying to follow his advice to the letter. Will he re-release his book with an addendum explaining why he ditched his strategy? Maybe apologize to everyone who bought the book?

    >This strategy – outlined in his latest book, Money for Nothing and Your Stocks for Free….

    What a horrible title. No such thing as ‘Money for Nothing’.

    This guy strikes me as unethical.

  5. Is this a contrarian signal to buy stocks?

  6. Funny timing since Jon Stewart takes on another “expert” tonight when Jim “buy Bear Stearns” Cramer is his guest tonight.

  7. if his leveraged bet had not worked out a long time ago, he’d still be a wage slave. he was lucky once, took advantage of it and wrote books.

  8. I agree with nobleea. Leverage is very powerful when used correctly. I know that most people here is very critical of Derek Foster. From what I read, I feel Derek Foster has one very positive trait: frugality.

    I have been thinking about the advantages of using ETFs lately. I thought about something that I haven’t read anywhere. You can use put options with ETFs and that gives you an effective downside hedge when needed. There are no put options with index funds. A lot of ETFs don’t have an active options market, but the big ones like SPY have a huge options market. Depending on the situation, put options can be bought at a reasonable price.

  9. Wow, poor Derek:-)
    He did mention however that he would be selling cash secured puts, which would make him purchase dividend stocks at lower prices if stocks fall further.. In addition to that he would be paid through the options premiums..

    His market timing is interesting indeed.. Maybe all of his stocks cut their dividends?:-)

  10. “In early February,….”

    So THAT’S why Derek has been curiously absent from the blogsphere.

    Third book in Derek’s series “Grey Power: writing resumes that work”

    DAvid

  11. If he held on while his portfolio was cut in half, why can’t he endure the ups and downs now? Shouldn’t those exact same stocks be a screaming buy right now judged on long term thinking? He is discrediting his past and future work.

    And seeing as he depends on royalties to subsidize his “retirement” he is taking a huge risk if this backfires and there is a strong recovery. What will that do to his reputation? No one can read the market, not even (especially) Derek Foster.

    I agree he made some good but risky moves early, and then wisely used his writing talents to capitalize on his fortunes.

  12. I feel this is the worst time to sell stocks. There is so much stimulus in the economy, interest rates are super low, and governments are flooding the economy with money. I think this will push stock markets up, eventually, and probably cause a return to inflationary times.

    Foster could buy back in anytime, since he seems to like large, liquid stocks, but if I recall correctly, he doesn’t like registered accounts, so he’s going to be looking at capital gains taxes this year.

  13. Gene, the only problem is that capital is vanishing way faster than the government can pump money into the system…not to mention much of this money will never enter the system as the banks refuse to lend it in this bleak economy…and why should they. I see no inflation for years to come.

  14. Canadian Capitalist

    florch: I would have had so much respect if he stuck to his stocks. After all, I believe the dividends from his stock holdings (as opposed to his income trust holdings) have held up pretty well.

    http://www.canadiancapitalist.com/2009/02/23/the-danger-in-chasing-yield

    I guess that Derek’s talk that he doesn’t care about the price levels but only the cash flow was just that — talk. When he experienced severe price declines, he reacted just as average investors would.

    gene: I concur with the usual caveats such as assuming that we are talking about the long-term, at least 20 years, preferably more.

    Ryan: Buffett holds another viewpoint — that inflation has the “potential” to be as bad as the 70s. He made that comment in a recent CNBC interview. He could well be right.

  15. CC: You need to do a post on how to buy Real Return Bonds from different brokerages. Real Return Bonds will protect one from 1970 style inflation. If inflation isn’t bad, Real Return Bonds will perform similarly to Treasuries or CHMC bonds.

  16. For some reason I think his book sales will go up again over the next few months, it’s good advertisement for the book.
    I guess he found it a lot harder than anticipated.

    Ryan: I also agree with CC on the inflation issue, specially with the quantitative easing going on.

  17. I don’t think anybody should take investment advice from someone who bet large on one stock in order to make his fortune. If just making a lot of money qualifies people to become an investment guru, then every winner of the Super 7 or 6/49 should be an investment guru.

    I haven’t sold off any of my equities. But I also haven’t bought any new equities from my new cash for the past year or so… And I’m still not planning to buy any more equity until I see something positive (or at least the absence of negative news) in the economic data.

  18. Having read his book, it’s was clear that his portfolio and his stock recommendations had very little diversification. But just because he wasn’t able to stomach the losses, doesn’t mean that his strategy doesn’t work. He just forgot to adequetly diversify.

    Many studies have shown:
    - Over the long term dividends have provided more than half of the total return for stocks.
    - Dividend payers perform better than non-payers over the long term.

    Derek’s mistake was in how he applied this strategy, not in the strategy itself.

  19. It’s a marketing move for the new book. Foster’s selling a new strategy for a “new” market. I winced at the part in the Heinzl interview where Foster describes selling put options as a “win-win.” Scary stuff.

  20. Sam: I winced at that as well. Options are not “win-win”. They are a gamble. You can win, or you can lose big. Just an example, many companies in my country of birth, Poland, got into currency options in the last few years. Everything was going well until the recession hit and Polish currency collapsed and the options were called in. _Conservative_ estimates say around $20 billion was transferred from Polish companies since – a lot of them won’t survive and will be forced to go bankrupt. For Poland it turned a bad recession into a horrible recession. Was options trading a ‘win-win’ for Polish companies?? Heck no!

    There is no such thing as “Money for Nothing”. For Derek to write something like that is disingenuous and unethical (or ignorant). He went from a passive investor with a reasonable strategy to a gambler.

  21. I think this shows that Foster was lucky, not good. If he was truly smart and was selling because of the downside risk in the market, he would’ve done it last summer or before when P/E ratios were so far out of whack but prices hadn’t started falling. Doing it now is just reactionary.

    A strategy that only works in a bull market isn’t a strategy at all. Similarly, now is when you find out what a person’s risk tolerance really is. Turns out Foster’s is pretty low.

  22. That’s great! I am a fan of holding dividend paying stocks, but it is hilarious that even he jumped off his own bandwagon!

  23. Derek Foster has fallen completely under the influence of Ben Graham’s, Mr Market.

  24. Canadian Capitalist

    Phil: That’s a great analogy. And you’ve been consistently saying that Derek has simply been lucky with huge leveraged bets.

    Sam: I can buy the argument that options can help in managing risk (by limiting return; there is still no free lunch) but as I mentioned in a post on reviewing The Lazy Investor just the term “Money for Nothing” makes me shudder. You may be right that these new revelations may be a marketing tactic but Derek has lost all credibility, IMO.

    brian: I think there are flaws in Derek’s strategy. The biggest one, IMO, is not holding any bonds at all even in retirement — it made the portfolio risky for someone who depends on portfolio income to pay the bills. I also think (and I’ve raised this point before) that the portfolio withdrawal rate was far too high for someone with a 50-year time horizon and even if we didn’t have a severe market crash, would have run into trouble at some stretch in the future. You don’t have to look back all that long for periods when dividends were essentially flat.

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  26. CC, I agree. It was foolish of him not to have any bonds, I guess he thought that he could stomach a 100% stock allocation. I’m not exactally sure what his withdrawl rate was, but I would consider anything over 4% adjusted for inflation quite excessive.

  27. The thing that struck me the most after reading the Star and Globe articles was the last sentence in the Star article:

    “How can a guy retire at age 34? I’m the biggest contrary indicator. It shouldn’t happen that way.”

    In other words, Mr. Foster now characterizes his own ability to retire at age 34 as having been a function of a poorly functioning bubble market! (As a matter of fact, I agree. He came of age as an investor in one of the largest secular bull market of the last 200 years, 1982-2000. If he had started investing in 1966, at the beginning of a long secular bear market that left US stocks exactly where they started 16 years later in 1982, he would not have seen the kind of capital appreciation that his portfolio has seen (and probably not the same rate of dividend increases, either.)

    I have to say that I disagree with the some of the posts above on Mr. Foster’s use of put options (selling or “writing” them.) They are not a particularly risky strategy if they are for blue-chip companies with strong balance sheets that are likely to survive this recession. Writing a put option is very similar to setting a low “limit” buy order. For example, if you’d like to buy some shares in Apple eventually, say at $60, you could: a) either set a limit order for $60 (assuming your brokerage lets you go that low); or b) write a put option for $60 that expires sometime in the next 3-21 months, for which you will be paid a premium by the buyer of the put. So there’s a good reason why Mr. Foster would advocate writing put options (and that’s the only type of options trading he endorses) over simply waiting for a stock to drop to a desirable price.

    Derek Foster isn’t the only one who thinks that selling put options can be a relatively conservative investment strategy:

    “Put selling may be appropriate for the conservative investor when this is the objective [to buy a stock at a lower price.]”

    http://www.cboe.com/LearnCenter/cboeeducation/Course_03_01/mod_01_01.aspx

    Of course, put options DO have risks that limit orders don’t. The key risk, in my view, is that limit orders are easy to cancel if the investment thesis on the stock changes. For example, if it’s revealed tomorrow that all of Apple’s product ideas were stolen from a 14-year-old in China (who has now hired a good lawyer), and it looks like Apple is going to bite the dust permanently due to lack of future innovation, then if you had a limit buy order for $60, you would simply cancel it. If you had written a put option, it would be more complicated; you could cancel the obligation, but would have to pay a premium to someone else to take on the obligation (and the premium would be more than the one you earned.)

    Nonetheless, I think that in the right circumstances, and with one’s eyes wide open as to the risks, writing put options can be a good strategy for some investors.

    (For more on options, http://www.cboe.com/LearnCenter/Concepts/default.aspx is a good resource.)

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  29. CC,

    Thanks for the post. I was wondering what Mr. Foster was up to lately.

    I have to agree with you. No bond in retirement is basically a stupid decision. You need some capitial protection for this exact situation.

    Tim

  30. The problem with his trying to time the market is that a lot of bad news is priced into stocks already, and that stocks are forward looking. They will recover when the economy still looks awful.

    I don’t think no bonds in retirement is necessarily bad. However, I’d be reluctant to go 100% stocks without a substantial capital base, say in the million dollar plus range.

  31. Steve in Montreal

    How to spot a charleton:
    Clue 1: He didn’t actually retire. He just changed professions from an hourly rate to selling books.
    Clue 2: The dude made money by convincing novice investors that they too could retire early using his method. Can anyone say “Bernie Madolff.
    Clue 3: He assured people on other forums his strategy works and marketed his books there.
    Clue 4: He didn’t follow his own message. (This only came out after the fact). He ignored his “audience”.

    As WB says “buy when people are fearful”. DF has run away with his tail between his legs!! I’ve lost total respect for this guy. Any drivel he says or writes is hogwash!!

  32. I wonder what Mr. Foster’s portfolio was worth at the top?

    The article is not specific on how much of a hair cut he took.

    I also wonder what the dividends generated by the portfolio were at the top and at the time he sold.

    My portfolio has fallen a lot (50%) but my dividends are down by only about 10%

  33. Thank you, thank you, thank you Canadian Capitalist for bringing this to everyones attention. I feel like a fool for just reading his books.

    Count me in as another person who as lost all respect for this guy. I mean maybe things are different when you have a larger portfolio and loosing 30% – 40% would scare you….but if you really practiced what you preached and truly believed in the long term growth of stocks and the ongoing dividend income they provide then this market should not concern you….especially if you are in your 30′s…

    I am in my 30′s and I truly believe that over a 30 year period stocks are the only place to be in order for your money to outpace inflation and grow, so I really have no choice than to put all my money in the market and wait it out….I’ve lost 35% but I still sleep well….and if I am wrong and after 30 years my money went nowhere in the market then there are probably be bigger things to worry about as the world economy has probably colapsed….

    DF I no longer trust you….

    and Stever you are Spot On!

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  35. Thanks for this…. I’ve been wondering how Foster has been doing. I can’t believe he has cashed out. He went against his number one principle. If he made it until Feb, I don’t understand why he couldn’t wait it out.

    He did have a large percentage of his portfolio invested in income funds…. many… if not most have since cut their dividends.

    I feel dirty now for enjoying his books so much…lol

  36. For anyone who is interested, DF appeared on CBC’s The Hour Monday night to talk about the economy and his recent sell off.

    http://www.cbc.ca/thehour/videos.html?id=1063578735

    • Canadian Capitalist

      I checked out that CBC The Hour video. I’ve got to tip my hat to Derek. He is a brilliant salesman, for sure.

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  38. I have respect to Derek Foster and his strategy. But I have pulled my money money before the market crashed of Sept. 08 and get back to it this year.

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