Book Review

Money for Nothing: Book Review and Interview with Derek Foster

Derek Foster is the author of “STOP WORKING: Here’s How You Can!”, “The Lazy Investor”, and most recently “Money for Nothing:  And Your Stocks for FREE”.  When I happened to stop by his website recently, I was surprised that there was a new book posted there (I enjoyed both his previous books but I hadn’t heard of his newest).  I contacted him and asked for a review copy and an interview and delightfully received both.

His new book presents some ideas for how to earn “more money faster” (especially targeting people who want to reach financial freedom faster but are behind in their savings).  He intended this book for more sophisticated readers (which I was happy about, as I found his 2nd book more basic than I would have liked – it was intended to target beginners).

The central idea (explained in detail in the book) is to sell put options (where you agree to POTENTIALLY buy a stock over a period of time for a set price) in order to earn income or to acquire stocks you want to own at a better price (hence the title).  He makes a fairly strong case that while there is risk in the process, it can be minimized much as a casino takes a risk every time it lets a gambler make a bet, but reliably gains overall.

This is a book for people interested in a fairly advanced vehicle to consider for improving your returns on stocks you’ve picked.  I’d recommend such people pick up this book as it’s a fast, informative and enjoyable read.  Beginner investors would be better served by other books (including Derek’s previous two books).  Passive investors will find little of interest.

I’m looking forward to reading the reactions to this book from other bloggers and the media.  Mr. Foster was good enough to answer my following questions by e-mail.

MC:  How quickly do you think you’ll get sick of Dire Straits references while you’re promoting your new book?

DF:  There are worst things I could be referenced to and have been referenced to, LOL!!!

MC:  I predict you’ll hear some pretty lame jokes about it before the month is out.  I believe “Money for Nothing” is currently available from your website “”, when will people be able to purchase it at traditional bookstores?  Are you going to be doing any signings / talks to promote it?

DF:  It’s available at my site and also at Chapters/Indigo across Canada. Independent bookstores will order it over time depending on their demand. So far the only speaking engagement will be at the Financial Forum Show in Toronto (January) – I generally don’t do many public speaking events.

MC:  It’s tempting to swing through Toronto to catch that.  Throughout the book you worked with returns ignoring inflation (e.g. pg 17), except when you discussed fixed income. Did you feel your readers would already understand this distinction between real and nominal returns, that it was unimportant, or that it would obscure your message?

DF:  My first draft had nominal and real rates of return, but I always get “non-investors” to read my books and let me know what is confusing for them. I went with nominal returns for simplicity from feedback I received.

MC:  Whenever I’ve posted and tried to stress the difference, it definitely made the post more convoluted, I can understand stripping it out to simplify things.  I’ve made the same mistake you have by buying too soon (pg 23) and the whole “don’t try to catch a falling knife” adage always makes me glum.  HOWEVER, one of the downsides of your put selling strategy is that you will sometimes (often?) not execute a trade (the option won’t be exercised) and you’ll miss a dip in the stock.  Do you view these two “risks” as balancing each other out, an unavoidable aspect of investing (its impossible to know the point of maximum pessimism?) or are you now completely and totally in the put selling camp (and will never try to buy on the dips) and feel its better to miss a buy rather than overpay?

DF:  A few years back Warren Buffett was sitting on over $40 billion – waiting for “the perfect pitch”…and he kept waiting. I always hate waiting to buy (while earning 2% in my bank account) and worrying I might miss out – so I often pulled the trigger too soon. Buffett’s had the financial war chest to do some buying lately and overall his patient strategy speaks for itself. I’m trying to increase my “margin of safety” with my purchases and move as close to Buffett as I can. The “money for nothing” strategy will help me get paid to wait for my own “perfect pitches”.

MC:  You make the point in your book that getting a stock at as low a price as possible dramatically improves your returns, so I don’t blame you with keeping your focus on getting a good price.  There’s clearly a passion in the Canadian investing community for your style of stock selection.  Have you ever been tempted to start investing for other people (a mutual fund or whatever) or would that be too much like work for a retired guy?

DF:  Professional investors are forced to show short-term gains (or at least keep pace with their peers). In the late 90s, my portfolio held steady while hi-tech investors gained – but this was reversed after 2000 and my portfolio did very well. However, if I would have been investing other people’s money, I would have been fired long before my portfolio strategy bore fruit.

MC:  The short term focus of investors can be discouraging.  Your approach seems to be built on a similar philosophical outlook to Geraldine Weiss and Tom Connolly.  What do you think of their approaches (neither is listed in your recommended reading)?  Both approach buying in a similar manner to you, but Weiss’ idea of selling dividend stocks when they are “overvalued” is markedly different than your’s and Connolly’s “buy and hold forever”.  Are you ever tempted to sell a stock that’s shot up in value more than the dividend has increased and buy something with a larger income stream?

DF:  I generally try not to sell and buy something else. If I sell, that triggers capital gains which means I now have less capital to put to work in another investment. If I keep my money invested, I’m essentially getting an “interest-free” loan from the government (by deferring capital gains taxes)

MC:  Buying and holding forever definitely simplifies things (and has solid reason for doing so, as you say).  The MoneyGardener and I have gotten into a few friendly debates over whether dividend yield or dividend growth is the more important consideration when selecting companies.  Which side would you weigh in on (or are we arguing about angels dancing on the head of a pin)?  I may not include this question if you agree with him ;-).

DF:  I had some “high-yield, slow growth” investments when I retired – so that I could stop working quickly. I didn’t want to continue to rely on earned income for any longer than I had to. However, I tried to balance that with “lower yield, higher growth” investments so that my income would keep growing faster than inflation.

MC:  A diplomatic answer, which I’ll take as complete and utter agreement with my position ;-).  Many authors publish articles or books and reading what they write is the only way to interact with them.  You’ve taken a far more interactive approach in the “Canadian Business” forums.  There, in the blogging world, and in the national press you have been both praised and attacked (sometimes by the same people).  I’ve been impressed that you seem to keep your cool under attacks.  Is that just a part of running a business (you can’t get into flame wars with your readers) or are you really that unflappable?  You respond to readers’ questions on-line and in your books, have you ever thought about starting a blog?  Do you regularly read any of the Canadian personal finance blogs (other than Four Pillars, of course ;-)?

DF:  I get and offer feedback for a few reasons (some selfish, some not). It helps answers readers’ questions in case there are things they didn’t understand, additional coverage helps sell books, I get ideas from investors on what topics they are interested in (ideas for new books), and my strategy can be challenged just in case there are some factors I haven’t considered.

MC:  I think you’re right that there are benefits to both your readers and yourself from your approach (which has been quite different than the traditional publishing approach).  The Canadian Capitalist points out that there has recently been an exceptional decade of very good returns for dividend stocks.  Are you concerned that people who follow your strategy after looking at the results you post for the last decade might be disappointed with their future returns?  Do you think that your early retirement may have been possible in that environment but that those of us investing today might have to wait a bit longer?  You suggest in your 2 most recent books that you think refinements in your strategy would have let you retire even younger.  Is that assuming returns comparable to what you experienced in the past or are you confident about that even in the current and upcoming market environment?

DF:  Dividend growth is based on earnings growth over time, and with 3-plus billion people suddenly adopting capitalism, I feel dividends of good companies should grow nicely over time. I think I would have retired sooner if I had followed my strategy from the beginning. I am a better investor today than when I was on my early retirement journey.

MC:  I hope those of us using some of your ideas are as successful as you have been.  Almost all investing books have a “good story” (like the book on commodities investing you mention on pg 29-30 which puts forward the idea that developing nations would lead to a boom in commodity prices). The philosophies behind them all seem to make sense, but often they are mutually contradictory (and will even attack each other).  How do you recommend readers select from a range of authors who each suggest future gains from their approach?  Obviously trying each out over a couple of decades isn’t possible, and as you quote Buffett “if past history was all there was to the game, the richest people would be librarians”.

DF:  Buy solid companies that sell products/services that are needed and then sit back and collect the dividends. If there is a “story” you agree with, add some solid companies within that area and then sit back and collect dividends. Repeat as necessary.

MC:  I’m certainly a big fan of collecting dividends!  You’re quite damning of buying on margin (going so far as saying your Altria/Philip Morris bet was one of your worst investing mistakes).  I have a leveraged plan (using margin, as you discourage, instead of a paid off house as you encourage).  What level of investor expertise would you consider acceptable for a small margin position (maybe 10% on margin), or do you stand by your assertion that no one should ever do it?

DF:  Once you margin, you are dependent on stock market fluctuations. That’s why I would only borrow money in situations where I’m not suddenly forced to come up with money to cover losses such as a HELOC – I don’t want to depend on the performance of the stock market.

MC:  Its definitely good advice to make absolutely sure your broker can never force you to sell (as you mention in your book).  You also mention at the end of your book that you currently have puts on a number of US companies.  At what point in your “financial journey” did you first start using your options strategy?

DF:  I don’t generally like options as it always seemed like gambling to me (a loser for every winner), so it’s only fairly recently that I started using the put option strategy.

MC:  I suspect there will be some people with a strong reaction to options, but I think you do a good job of explaining the basic idea of selling puts as well as the benefits and risks.  I expect the primary attack people will make on your book is that buyers may sell puts on stocks they want to own, the options won’t be executed, and they will miss out on gains they could have made by buying the stock instead of selling the put (if we hit a strong bull market, they’ll have the nice return from the premiums, but will have missed out on a nicer run up in stock price).  Especially if they have the cash sitting in a savings account and could have just made the purchase outright.  Alternatively, some *MAY* attack it from the opposite direction, saying that you may be forced to buy a stock at a higher price than its “worth”.  I don’t think there’s any value in the second attack (since you’d face the same risk if you’d bought the stock and it dropped in price), but I’m somewhat sympathetic to the first one.  You mention in your books that you’re acting as a casino, accepting the volatility in exchange for the options premium.  Do you think this will be the point more traditional investor fixate on or do you think there’s another element of your strategy that will bother them more?

DF:  If you have a target price to buy a stock at, if it never reaches that target price –you’d never buy the stock. If you sell options at that same target price, how are you in a different position? (except for the fact you’ve earned premium income) In my strategy, I’m harnessing volatility to my long-term advantage (the same way any value investor does).

MC:  Yes, definitely.  With each of your books I’ve enjoyed the ideas, but have had trouble with the execution.  In “Stop Working” I read it when it was first published and decided I should buy Pfizer and GM.  I lost my nerve (after talking to my father) and have been somewhat relieved that I didn’t buy GM as they’ve been going through a prolonged melt-down since.  Years later I picked up BMO, NA, ROC, BAC and GE following your approach (and have been happy with them, even though overall I’m in the red).  I liked your DRIP approach in Lazy Investor, but never went through the process of setting one up (partially I was past the point where I needed to do so, I had enough cash to justify an account with discount broker).  Similarly, I’ve looked into options and found them VERY complex.  You recommend going to a discount broker options seminar to learn how to execute the strategy you recommend.  Do you think many of your readers will follow through on this?  Do you think all of them will understand it well enough to be executing trades selling puts?  Do you think they’ll have trouble getting authorization from their brokers for an options update to their account (I’m imagining people manning the call centers will start hearing “Money for Nothing” by Derek Foster as a justification why they should quality for a higher level of trading)?

DF:  I don’t mean to be offensive, but GM does not fit the criteria I outlined for stocks in “STOP WORKING” – I would never touch it with a 10-foot pole as it fails on many fronts. The “money for nothing” strategy is very simple, IMO. Figure out how much you’re willing to pay for various stocks, then sell options at those strike prices.

MC:  You’re definitely not offensive!  Considering buying GM is but one of the many, many foolish things I’ve done.  What do your family and friends think of your books?  Do any / most / all of them follow your investing approach?  (other than your kids, who clearly *do* follow your approach <grin>)  What does your wife make of it all (maybe she assumes all Canadian men are best selling authors :-)?

DF:  Some have asked me for advice, but I don’t go there for a variety of reasons. Investing is a big part of who I am, so my wife accepts that (and is happy with the results).

MC:  A happy wife is a happy life.  Have you had anyone approach you having lost money using your strategy?  What was your reaction?  (anyone providing financial advice or ideas would have to deal with this I imagine, I still feel awful after I mentioned to a friend that I thought “Washington Mutual” might be a good buy during the sub-prime meltdown).

DF:  Again, I don’t get into specific stock picks. I have never had anyone who has mentioned my dividend-based strategy did not work for them. There are a few people who emailed saying the strategy helped them reach their financial goals – which was gratifying.

MC:  Not getting into specific stock picks is unbelievably good advice (which I’ve heard many times and foolishly ignored, see what I mean about the GM thing?).  How many more books do you expect to write?  Any ideas for the next one yet?

DF:  I have no idea what I’m doing next week, let alone any plans for another book. I’ll probably write another (I enjoy it), but it will depend on what ideas are generated from people who contact me.

MC:  Well, if you’re ever looking for ideas for a book, I have some about a frugal man (and the women that love him) that’d make a great romance novel…

Many, many thanks to Derek Foster for sending me a copy of his book and for taking the time out of his busy schedule to answer my incredibly long list of questions.

I’ll be passing my copy of his book (with a personal message written to Mr. Cheap on the inside cover, for extra collectibility) along to Mike, who in turn will pass it along to Guiness416 (both of whom will hopefully consider writing a review).

19 replies on “Money for Nothing: Book Review and Interview with Derek Foster”

Awesome post…a Pillar post indeed (no pun intended) ! I just did a book review a little while back on Derek’s “Stop Working” and its great to see a review of his latest. Good stuff!

There’s actually significant evidence that selling puts brings higher risk-adjusted returns than would be expected with an efficient market. Of course, there’s no reason to assume this will be true going forward, but it’s worked in the past.

Actually selling front month slightly out of the money covered calls on covered puts on the S&P 500 does seem to increase the risk adjusted returns.. while keeping the end result pretty close to what a pure buy and hold investor would have achieved.

It’s funny how Derek Foster keeps churning books almost every year in retirement. He is either pretty bored jsut checking how much dividends he has received in the mail or he is looking forward to adding more income streams to support his growing family..

I believe that he should start blogging. He could create another income stream this way.. Or maybe that will be his 4th book.

I haven’t seen his new book mentioned anywhere else yet, but his last one was everywhere. Weird. Very nice interview Mr C; I can tell that this book will appeal a lot to my better half, who gets agitated with my loyalty to e-funds and IRL.

What’s the Financial Forum show? Is that something worth checking out at all in terms of seminars/speakers, or is it just a big opportunity for people to try to sell me products i don’t need?

Past freebies I’ve received include cloth bag from Spectrum United funds, mini stuffed football from Templeton funds, magnifying ruler from Scudder funds, t-shirt from Dynamic funds, paper holder from Dynamic funds

A magnifying ruler, my friends! Actually, that review piqued my interest enough to try to check back for their speaker schedule in a couple of months.

The forum is basically sales from what I understand. Various investment companies set up booths with brochures showing how well their funds are doing etc etc.

They have speakers might could be more interesting (but probably aren’t).

This was an excellent enterview. I have recently bought Derek’s latest book and thought it is very inspiring. I follow his “teachings”

I am just curious as to how you are going throught this downturn with your portfolio. Are you making any changes as some company might be reducing or eliminating their dividends.

Am curious how Mr Foster has done in recent months – hopefully his recession proof strategy is working

Girlfarmerwanabe: I wonder that myself. I *SUSPECT* since there haven’t been many dividend cuts at Canadian companies that he’s been buying up lots of equities and has been really happy at the downturn.

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