Financial Good News Too

Okay, so things aren't all bad (although they really seem that way right now). On Thursday I sat in my bank discussing my RRSP's with one of their financial services reps. It was actually a bit surreal because I knew about the cost we were incurring for the car and yet I was sitting there discussing moving thousands of dollars around.

It's not like I could access the money anyway. I'd have to pay taxes on anything I took out and I'm not allowed to because I took out money a little over a decade ago to use as a downpayment on my condo and I'm still repaying it. (The Canadian government allows you to take it out without penalty for that purpose so long as you replace it within 15 years. I'm almost done with that but still have a couple of years to go.)

I've mentioned before that I have the bulk of my RRSPs in GICs. I may not be making a fortune in interest, but I haven't lost any money yet (and my deposits are guaranteed by CDIC). Mutual funds, stocks, bonds, etc. aren't!

So, I had a GIC mature a couple of weeks ago and it's been sitting in my money market account making an atrocious .05% (yes, that's 5 one hundredths of one percent per annum!) ever since. I just didn't have time to go in earlier and I knew that I had another one maturing any time. So, at this moment, I have 2 of them sitting there and a 3rd one maturing early next week! The 4th one also matures in October, but not for another year.

Now, there are a couple of ways to handle GICs and maturity dates. Trent was just talking about laddering his CDs as a higher interest (but still very accessible) emergency fund. I'm actually doing the opposite. I'm combining the 3 of them and putting them into a 2 year GIC paying 4% because I don't want to have to worry about a bunch of different maturity dates. Next year I'll probably take that last one and put it into a 1 year GIC even though the rate won't be terrific (they're currently 1.9% to 2.5%) so that I can finally put them all together in late 2010.

Will I change them to a laddered format later? Possibly, as we get close to actually retiring. But, for now, it's more important that they be as simple as possible. And that they get the best guaranteed rate possible.

CPP and Me

I wanted to know how much money I could expect from my Canada Pension, so I asked for a Statement of Contributions. According to the government, if my earnings continue at this level until I turn 65, I could expect to get $385.91/mo in CPP benefits. It’s nowhere near the current maximum of $884.58 thanks in part to all the years I spent as a SAHM, but I can have those years “dropped out” and have the amount refigured. Or I could apply to split my ex-spouse’s CPP for the duration of our marriage. Now there’s a way to bring your ex back into your life after almost 25 years – just arrange to have the government take half his pension eligibility for a 7 year period!

I also have an annuity that was purchased for me by a previous employer that will pay me $98 or $100/mo, so let’s just say that I can count on $485.00 per month. Next there’s Old Age Pension. How much does that pay? It looks like $505.83. So, that’s a total of $990.83 per month, or $11,880 annually just for me.

My hubby should apply for his Statement of Contributions too, but I know he’ll make more in CPP because he makes more money than I do. However, he doesn’t have that handy dandy little annuity waiting for him. The average amount of CPP is currently $481.46, so let’s use that for him. Combined with OAS that would give him a monthly pension of $987.29 or an annual amount of $11,847.48. That’s a total of $23,727.48, or just a hair under the $24,000 in today’s dollars that I estimate we’ll need to live at a fairly basic level in retirement.

(It should be noted that all the money for CPP and OAS is in today’s dollars and that the amount of our CPP pensions would continue to rise if our incomes continued to rise over the next 15 years. The OAS pension amount is set annually and gets adjusted upwards.)

All of this makes it look as though my fears of us being destitute in our senior years are not based in fact. You can even go back to work after you retire and continue to receive your CPP. You just don’t contribute to CPP anymore and your pension amount doesn’t change. (In contrast, if you put off applying for CPP until your 70th birthday and continue to work in the meantime you’ll be given 30% more than the pension you would have received at 65.) Now, that’s not to say that I want to work until I’m 70, or want to retire and then start working again. I’m just stating the possibilities.

And what about our RRSPs? Well, they would give us money on top of our basic needs to do the kinds of things we want to do in retirement. Right now we have about $13,000 in RRSPs between the 2 of us and will put in another $16,800 over the next 15 years at our current (extremely low) rate of savings, for a total of at least $30,000 (ignoring interest at about 3%). At a 4% withdrawal rate, that would mean we could take out $1,200/year or $100/month. That’s not enough money for much in the way of travel, although it might improve our general standard of living slightly.

So, I’m going to say we still don’t have enough in our RRSPs. We need to improve on our savings in order to live it up just a little in our old age. But we’re unlikely to be fighting Dog for his dinner, which is good news.

Nothing New Under the Sun

I've been going through boxes of books recently and, in one, I found an old book on personal finance that was given to me by a friend. I chose to read through it again before deciding whether to give it away and found a lot of familiar ideas, combined with an 11 page chapter on the American government and a few snicker-inducing comments.

Now, this isn't the book review I promised for July. I can hardly do an official "review" of a book that was written in 1983 and probably hasn't been in print for years. I mean, really, how would you go about getting the book if you were interested in reading it (other than borrowing it from me, I guess)? However, I thought there were some interesting things I'd like to comment on.

The book is "Never Say Budget! How to put money in the bank and still have freedom to spend" and it was written by Mark and JoAnn Skousen. After reading the book I did a Google search on Mark's name and discovered he's a well-known economist and libertarian who is still active. He has a Ph.D. in economics and she was majoring in English and economics when the book was written (back when they were thirtysomethings).

I have to say that I'm surprised because I wasn't tremendously impressed by the book in terms of content, writing or organization. I would say that the gist of the book is well summed up by the 'Seven Golden Rules for Financial Success' listed in Chapter 11. The rules are:
1. Put savings first.
2. Save at least 10% of your income.
3. Make it easy to deposit your savings.
4. Make it difficult to withdraw your savings.
5. Invest your savings wisely.
6. Control your spending.
7. Control your credit.

Did anything there make your jaw drop at first glance? Didn't think so. But there are actually a few unusual aspects to the rules.

First, when he says to put savings first that's exactly what he means. You should put money into savings before you pay your mortgage, or buy food for your kids and you should do it even if you're on welfare. That's pretty hard line.

But when he talks about saving 10%, he's talking about your take home pay, whereas gross pay is what is more often recommended. And when he suggests making it difficult to withdraw your savings, he doesn't mean something like ING that takes a couple of days to transfer back into your bank account (ING Direct didn't exist then anyway). No, he's recommending things like choosing mutual funds with a back end load, the inconvenience of having to auction off antiques or tying up your money in real estate so you'd have to pay commissions! I don't want those kind of costs associated with accessing my money. After all, I'm going to have to take it out eventually in order to use it and I want the most money possible. I just don't want to be able to go to an ATM and yank it all out this second.

"Invest your savings wisely" is a no-brainer. I mean, who sets out to invest unwisely? Finally, I wouldn't have thought of separating credit cards out from the rest of the family spending. It's all money going out; it all needs to be controlled.

The weirdest thing about the book, in my opinion, is that it's ostensibly about saving and controlling your spending without using a traditional budget. But it takes forever to get to the point. As I said earlier, there's 11 pages on the US government, Keynesian economics and how Congress spends money. Then there's a summary of an Andy Rooney segment on how he's spent all the money he's made in his lifetime that probably takes longer to read than it took Andy to tell it. Oh yes, and the text of the Robert Frost poem, "The Road Not Taken". Because that has everything to do with saving money. There's also a chapter on how budgets don't work for Americans, but that the answer is tracking all your expenditures instead. Okay. I just happen to consider tracking my expenses to be pretty much, uh, budgeting.

Finally, we get to all the rules, chapter by chapter. It's really here that I can see the influence of the inflation of the early 80's. There are at least a couple of disparaging comments about passbook savings accounts that 'only' return 5 1/4% (we'd love to see that again) and a mention of .25 candy bars (ditto), along with a recommendation that every investor should have some portion of their portfolio in gold and silver coins.

But there's a lot that sounds like 2008 too. There are discussions on credit cards with high interest rates, debit cards, consolidation loans and bankruptcy. There are the requisite explanations of American retirement savings plans, such as the IRA and Keogh (relatively new at the time the book was written) and dividend reinvestment plans (a la Derek Foster). And the discussion of short-term interest only mortgages and their dangers eerily foreshadowed the current sub-prime mess. From p.143-4: "Yet real estate slumps seldom hit everyone at once. Not being able to make payments or sell your house is a private emergency, not a national one.....those who overextend themselves are likely to lose their homes."

All in all, it was an interesting, if not particularly well-written, book although I didn't end up with much in the way of new information. It seems there truly is nothing new under the sun. So, ultimately, I think it really is one for the give-away box. Now, if you'll excuse me, I'm off to buy a .25 chocolate bar!

Book Review: Stop Working, Here's How You Can Do It! Conclusions

So, what did I think of “Stop Working, Here’s How You Can!”? Will I be able to replicate Derek Foster’s experience and retire in 12 years time? Or is it just hype?

First of all, I have to admit that I read Derek’s second book “The Lazy Investor” first and bought “Stop Working, Here’s How You Can!” in an attempt to understand a little more about how his strategy worked and how he did it. And I do have a better sense of how the process worked now.

I also realize that there are very definite omissions. Let’s look at the basic ideas. Derek started putting away $200 per month in 1992 and retired in 2004, 12 years later. He started off investing in mutual funds, but switched to buying stocks and income trusts that paid regular dividends or distributions. He bought stocks in established companies he believed to be recession-proof, that had a long history of paying ever-increasing dividends. He reinvested the dividends and added additional funds from his GST rebate, tax refund, job bonus, etc. over the years.

This is all very solid advice, but what would that reasonably get you 12 years down the road? Well, $200 x 12 x 12 = $28,800. For the sake of argument, let’s say he also had another $2,000 per year from various sources to add, or another $24,000. That would give him $52,800 to invest. Remember compound interest doesn’t enter into this, because he’s buying the stocks each month and then holding them indefinitely. They’re generating dividends that are being reinvested, that’s true, but even if he were to have doubled the amount of shares by this reinvestment (highly unlikely in 12 years, I think) he would have $105,600.

It happens that the sample portfolio he lists in Chapter 20 would have cost $103,500 if it had been accumulated at various times between 1993 and 2000, when the prices of the individual stocks were each relatively low (even though he apparently didn’t accumulate cash and then buy large quantities of a single stock, but rather bought a few hundred dollars worth each month).

Anyway, the quantities listed of the sample stocks would pay (at the time of writing) about $18,845 per year in dividends and distributions and this income would be only minimally taxable. That doesn’t seem like a large income (frankly, I make more than that per year working just over half time) but the key point is that there would be little or no tax to pay once all the figuring was done, plus there would be no health care premiums and additional money in child tax credits for parents, etc.

As Derek pointed out in Chapter 19 when he looked at how much money a person really needs to retire, a couple with 2 kids and one wage earner making $60,000 gross per year could actually end up with less available income ($22,265) than the same family earning $18,845 in dividends (who would end up with a net income of just under $25,000 after child tax benefits, GST rebate, etc.).

Looks good on the surface, right? But key in that evaluation of the wage earner’s salary were a mortgage ($14,196 per year) and a car payment ($3,600 per year), expenses that don’t appear in the dividend earner's list because Derek says you should have all debt including house and car paid off before retiring. Now, you can pay a car off in 3 to 5 years, but a mortgage is generally a 25 year term. I shortened my period to just over 20 years by making payments weekly instead of monthly, but you still have to pay down chunks of the principal in order to pay your place off within this 12 year time frame.

The mortgage he shows for the wage earner is $175,000. Since you need a minimum down payment of 5%, this means the family has a place worth at least $185,000 and put down a minimum of about $10,000.

First of all, he could have bought the condo I sold last year for that kind of money in Vancouver, but not much more and certainly not a single family home. (One of the issues with owning a condo is the ongoing strata or maintenance fees. You may pay off your mortgage, but you’ll pay strata fees forever in a condo.) It may or may not have been realistic for Ontario (or perhaps small town Ontario) when it was written in 2005 but it certainly wouldn’t buy adequate shelter for 2 adults and 2 children in Vancouver in 2008. Right now single family homes in Vancouver start at around $500,000 for an old house on a small lot. That would be a minimum $25,000 down payment and a $475,000 mortgage, way out of our $60,000 wage earner’s budget.

All of this leads one to believe that Derek had financial help getting into his home. I mean, where would the down payment have come from at the very least? And how do you pay down the principal on your mortgage while you’re putting every windfall into adding to your investment portfolio? This is one area that really doesn’t bear up under scrutiny, especially as I’ve read elsewhere on the Net that Derek has a paid for home and an investment property! In addition, he now has 4 children, according to a post he made in September 2007.

Raise 4 kids, pay off your home early, have a rental property, plus invest a little over $100,000 in dividend paying stocks all in 12 years, while earning around $25,000 per year! That is really stretching the boundaries of believability.

Now, the other thing I’ve read on the net (and Derek didn’t dispute it) was that he made one or more highly leveraged deals that really paid off and that’s where a chunk of the money came from. All well and good, but not highly replicable.

Can I do it with my family? Well, we’d have to divert the money my husband currently puts into his RRSP and add about $150 that would be very hard to come up with at the moment. (I couldn’t divert my RRSP contributions, as I’m still required to repay the money I took out of my plan for the next 4 or 5 years.)

I could invest that $200 per month in dividend paying stocks, but I’d be paying more for them per share than he did early in the decade. We make too much money to get the GST rebate, our child benefit payment will probably be in the $50/month range and my husband actually owes a few hundred dollars in taxes every year, so there’s no refund or other money to increase the annual contributions. And since higher share prices mean I’d be able to purchase fewer shares, they’d pay less in dividends. That means I’d still be reinvesting my dividends but they’d be growing more slowly than Derek’s did.

All in all, I’d probably end up with about a quarter of what Derek did in a dozen years. That means only a quarter of the dividend income, maybe $5,000 per year. That’s better than nothing, but it’s not enough for us to live on, even at our rural home, although $18,000 to $20,000 in dividend income might very well be enough.

The bottom line is that there are significant gaps in the story of how he gathered enough money to retire and I don’t believe a person would be likely to replicate his achievement now in the same timeframe, given changes in the stock market, the economy, and the taxation rules.

Yes, the fact that the rules for income trusts will change in 2011 is significant and I think the best thing Derek could do right now is to revise his books based on current data. At the same time he could do some major editing to make his meaning clearer and he could provide some of the missing information.

I do think his strategy could pay off for a person who was just beginning to invest and who’s willing to wait 20 to 30 years to retire. I'm not sure it will work for someone like me who wants to retire within 10 to 15 years.

Book Review: Stop Working, Here's How You Can! Part 3

Here we are, all ready for the third instalment of Derek Foster’s book “Stop Working, Here’s How You Can!”. So how do the last 7 chapters shape up? Does he reveal any secrets? And what about that chapter on RRSPs? Isn’t it un-Canadian not to support them? Tomorrow, I’ll give my opinions.

15. The Tax Man Cometh, My Money Goeth!
Derek intends this chapter to provide a basic overview of Canadian personal income taxes (with a little CPP and EI thrown in). He recommends “Jacks on Tax” for a more in-depth look at taxation in Canada but also throws out a few Tax Facts.
Employment income is the highest taxed form of income.
Interest income is the highest taxed investment income source.
Income from dividends or capital gains attracts a much lower rate of tax than employment or interest income.
Investment trust income usually attracts a low rate of tax. [This is changing.]
Deferring taxes is a great way to accumulate wealth.
Split income with other family members wherever possible.

He has a bunch of examples but the bottom line regarding #3 is that a person in the lowest tax bracket, living in Ontario, who gets $100 in income from various sources will keep $70.50 of earned income, $77.95 of interest income and $95.54 of dividend income!

16. Home is Where They Send My Bills
Derek offers the following Housing Tips:
Never pay the posted mortgage rates at your bank. Negotiate!
Try to save as much as possible on the fees levied when buying a house.
Paying off your mortgage is one of the best investments you can make.
Focus on home-ownership as a means to lower your living costs.

17. I Owe. I Owe. There’s Lots of Work to Go!
This chapter contains the following Debt Rules:
If you have a credit card, never carry a balance.
Pay cash for your car and then make the payments (to yourself).
Tax-deductible debt is the best kind of debt to have.
If you’re a student, minimize the amount of debt you take on.

18. RRSPs? No Thank You
Derek talks about what an RRSP is and how it works. Then, he gives some tips (but you knew that was coming, right?).
It may be better not to contribute if your income is below $32,000.
Although contributing to your RRSP can be a great move, so is paying off your mortgage early.
Borrowing money from a paid off home and investing it can be a better strategy than buying RRSPs.
RRSPs can be used to split income between spouses to lower the overall taxes a family has to pay.

As the chapter title indicates, Derek runs counter to everybody else’s views and doesn’t like RRSPs. In fact, he doesn’t have one.

19. How Much Do You Really Need?
Isn’t this what everybody always wants to know? Derek thinks the final figure is less than your bank or financial advisor would like you to believe. His formula:
Total current income minus work related expenses minus all interest expenses plus new lower tax expenses plus costs for new hobbies equals the total amount of income you’ll need.

20. An Example Portfolio
When I first read this chapter, I understood it to be Derek’s portfolio, but it doesn’t seem to be exactly. However, it contains several of the stocks he owns and talks about the cost to acquire them both now and over the past several years, using what he paid for them as an example.

21. Your Journey Begins
Derek closes with a story of a salesman and passes the ball into the readers’ court.

Tomorrow I’m going to give my opinions on the book and Derek’s strategy for early retirement. I’ll agree with some things and disagree with others (can you guess which ones?). What will I say? What will my final judgement be?

Book Review: Stop Working, Here's How You Can! Part 2

Here’s the 2nd part of my review of Derek Foster’s book “Stop Working, Here’s How You Can!”. Does he give enough detail to allow the average person to follow in his footsteps? Will his strategy still work today? Can you really do this for $200 per month?
Let’s check out Chapters 8 to 14.

8. Put Your Money Where Your Mouth Is!
This chapter shows the thought process Derek goes through before buying a stock, using the example of Colgate Palmolive, a stock he actually purchased. He goes through the various items he listed back in Chapter 5 Let’s Pray for a Stock Market Crash and methodically ticks them off to see if this company qualifies. It did, and he bought it.

9. Location. Location. Location.
Now Derek comes back to real estate investing. His solution for obtaining the benefit of real estate ownership without the burden is a Real Estate Investment Trust (REIT). Basically the investment trust owns a lot of properties and the unit holders (like shareholders in a company) own a piece of the business, effectively owning a tiny portion of each building.

He spells out a list of advantages ranging from spreading out risk and being hands off to the tax advantages. [Don’t get too excited; the government made changes in 2006 that will take effect in 2011 and make it less advantageous.]

Then he talks about the various kinds of REITs and dismisses most of them (residential, office, warehouse and hotel REITs all get panned). Basically he likes 2 kinds, a retirement residence REIT and Riocan, which owns shopping malls and big box stores. [In his subsequent book, “The Lazy Investor”, Derek reveals that he sold the retirement REIT after it lowered its distributions.]

10. Electrify Your Portfolio!
Derek recommends 2 Pipeline Trusts (Pembina Pipeline Income Trust and Enbridge Income Fund) and 2 Power Generation Trusts (Algonquin Power Income Fund and Trans Canada Power). [See my comment above regarding changes to income trusts.]

11. Black Gold, Eh?
Derek talks about oil and natural gas both in the world and in Canada specifically. He’s a big fan of investing in the energy sector; stating flatly, “Everyone thinking of retiring should have some exposure to energy because each and every one of us is an energy consumer”.

He goes on to recommend 2 Royalty Trusts (Pengrowth Energy Trust and Canadian Oil Sands Trust) along with Encana as a recommended hedge for Canadian oil sands. [Right. Trusts again.]

12. How Do You Start?
Derek opens this chapter with a warning that trusts might not always enjoy the tax-deferred distributions that were the norm when he wrote the book (in 2005). A very valid warning, considering that government changes were made in Fall 2006 that will take effect in 2011.

Then he says that the previous chapters show anyone with a nest egg where to invest, but asks what someone with a low income can do to get started investing. He sets up the rest of the chapters, describing them as focusing on simplifying spending, saving money on housing, reducing debt, saving tax and discussing RRSPs.

13. Financially Free by 35! My Financial Journey Retraced
This is the chapter that discusses what Derek did. He says he started in 1992 (at age 22) by putting $200 per month into mutual funds. He graduated in 1993 with no student loan debt, having paid for his tuition with earnings from summer jobs. He alternated between working and taking off to travel to Europe, Australia and Korea (where he met his wife, Hyeeun) but kept contributing (although he sometimes deferred the contributions). While he started with mutual funds, he later added (dividend producing) stocks.

14. Simplify Your Spending
Derek feels this is crucial and lists some spending ideas that he then expands on.
1. Simplifying spending should not be a form of self-deprivation.
2. Budgeting does NOT work for most people.
3. Try to save as much as possible from non life-enhancing expenses.
4. Saving money is twice as powerful as earning more money.

The final chapters will cover taxes, housing, debt, RRSPs, how much you really need to retire, a sample portfolio, and putting the ball into your court. We’ll look at those tomorrow and then I’ll put in my .02 the following day. Did I like the book? Did I have problems with it? Stay tuned.

Book Review: Stop Working, Here's How You Can!

“Stop Working, Here’s How You Can!” is a book by Canadian Derek Foster that claims to show the average person how to retire very early (Derek retired at age 34). Is his experience replicable? Does his advice make sense? Is it something the average person would be willing to do? Let’s take a look at it, chapter by chapter. Since it’s 21 chapters long and I’m not the most succinct person in the world, I’m going to look at 7 chapters each day and then finish up with what I thought of it.

1. If It’s Broke, Fix It!
Derek opens with a couple of questions:
1. Have you ever asked your financial advisor why he is not already retired if he’s so knowledgeable about investing?
2. Are your investments working well for you?

His point is that you have to be the one who plans your retirement because no one else really cares and these advisors aren’t really financial geniuses or they’d be retired themselves.

Derek says he can offer a different strategy and that the rest of the book will deal with investing, simplifying spending, paying off your mortgage, eliminating debt and reducing taxes, along with an evaluation of the pros and cons of RRSPs.

He started this plan in 1994 and retired 12 years later. For him, this is the proof that his strategy works.

2. The Ultimate Perk? 52 Weeks Annual Vacation!
This short chapter consists of his story about riding a wild horse in Australia and selections from his list of things to do before he dies. His point is that if you retire young you’ll be able to do more of the things that would make your own personal list than if you work until 65 or beyond.

3. Money Isn’t Everything, But…
Derek touches briefly on compound interest and the Rule of 72, then goes on to give his opinion on various types of investment vehicles.
Bank Accounts
A good place to put your money temporarily, very liquid, protected by CDIC insurance up to $60,000 [although I’ve recently read elsewhere that it’s now $100,000]. The downside is the miserable interest rates.
Gold
Important historically, but Derek feels it’s not a good investment because it doesn’t increase in value quickly over the long term and you may cash out at the wrong time and lose part of your investment. He prefers “black gold” i.e. oil and foreshadows how he will cover it as an investment later.
Rare Coins and Collectibles
He doesn’t recommend it because it’s a lot of work with no guarantee that the items will increase in value and many possible negatives such as the risk of damage.
Real Estate
Derek rates real estate as one of the best investments although the downside of being a landlord (such as repairs and dealing with tenants) causes him to recommend indirect ownership (another area he’ll expand on later).
Bonds
He doesn’t like bonds for a long-term investment for 3 reasons. First, bond interest is taxed at your highest rate. Second, they’ve historically provided a lower rate of return than stocks. Third, bonds don’t provide as much inflation protection as stocks.
Mutual Funds and the Stock Market
Here’s where Derek’s eyes light up. He says that stocks are what allowed him to retire early and that his investment strategy makes his retirement plans “impervious to market crashes”. The strategy itself is spelled out in later chapters.

4. Getting Answers from “The Three Wise Men”
Derek’s Three Wise Men are David Chilton, Peter Lynch and Warren Buffet for reasons described throughout the chapter.

Derek opens the chapter by saying how much he loves stocks, but then goes on to tell the story of how he invested $5,000 in Intertan (the former Radio Shack, which is now known as The Source) and lost about half his money. Ouch. That experience taught him to research investments thoroughly before handing over any money. A few years later his supervisor at work gave him David Chilton’s book “The Wealthy Barber”. From there, he picked up the idea of paying yourself first and started investing $200 per month in mutual funds.

Eventually Derek decided to get away from funds because of the management fees, figuring that if he could eliminate a 2% fee he could save as much as $626,000 ($50,000 invested over 30 years, with a return of 12% as opposed to 10%). Still, he recommends mutual funds as a starter program while you have under $20,000 invested.

Looking for a way to duplicate the results of mutual fund managers on his own led Derek to Peter Lynch and his books “One up on Wall Street” and “Beating the Street”. One method Peter mentioned briefly for choosing stocks actually became one of Derek’s cornerstones. It was the idea of selecting stocks from “Mergent’s List of High Dividend Achievers”. He also picked up the idea of only investing in companies that a child could understand.

Derek also started reading everything by Warren Buffet and picked up certain ideas from him. Only invest in what you know and understand and ignore short term swings in the market because it’s like a manic depressive person.

5. Let’s Pray For A Stock Market Crash!
He lists 9 tenets that form the basis of his investment philosophy and then expands on each one.

1. Only invest in companies you understand
2. Only invest in companies that pay a dividend (preferably a rising dividend)
3. Look for companies that are selling cheaply
4. Invest in companies that are “recession proof”
5. Don’t focus on foreign companies
6. Only invest in companies that are dominant in their industry (or that cannot be seriously hurt by a larger competitor)
7. Only invest in companies that have displayed a long history of strong performance
8. Only invest in companies that have a strong brand loyalty among its customers
9. Once you’ve bought the perfect company, never sell it!

6. “Show me the Money!” Investing
Derek’s main focus is #2, above. He isn’t interested in buying low and selling high. He wants to buy stocks of stable companies that will return ever-increasing dividends (or distributions in the case of investment trusts). He uses the analogy of planting trees on your land, cutting them down to sell the wood, then replanting as opposed to planting an orchard and harvesting the fruit from then onward.

7. What Should You Buy?
Derek is not big on index funds (recommended by pretty much everybody else I’ve ever read) because he says that 90% of businesses aren’t worth buying at any price. He says to buy mostly Canadian stocks because it makes sense to keep most of your assets in the country where you live and will retire. Canadian dividend income (the cornerstone of his strategy) is also taxed more favourably than foreign dividends. He goes on to suggest the following stocks or areas.
· Big Canadian banks
· Big Insurance companies
· George Weston Limited
· Corby Distilleries
· Rothmans Inc.
· Mutual Fund Companies

It should be noted that in his subsequent book “The Lazy Investor” (which I will also review) he says his Weston stock has been somewhat disappointing and that he eventually sold his shares of Rothmans. He closes the chapter by saying if you want increased diversification you could look at American multinationals like Johnson and Johnson.

Tomorrow we’ll look at Chapters 8 through 14 including his story of how he got to where he is today.