In the 1960s and 1970s, Jim Slater was one of the top players in the City, and he remained active in business and investing until his death in 2015.
Slater originally qualified as a chartered accountant, but his column in the Sunday Telegraph, under the pen name ‘Capitalist’, brought him to public attention, running a portfolio that comprehensively outperformed the market.
Along with Conservative MP Peter Walker, Slater went on to establish the investment house Slater Walker Securities, which was a huge success in the 1960s and early 1970s, before crashing in the banking crisis of 1974. The firm came to be associated with the practice of asset-stripping — acquiring businesses and selling off anything that was deemed to be surplus to requirements.
It was as the author of The Zulu Principle in 1992 that Slater again became a household name. That book, and his subsequent Beyond the Zulu Principle in 1996, popularised the idea of investing in small cap stocks, and the use of the PEG ratio to help identify targets.
The PEG ratio
The price-earnings-growth ratio is a rule of thumb that attempts to combine the elements of growth and value into one convenient measure. At its simplest, we divide the price/earnings ratio by the expected growth rate to arrive at the PEG — the lower the PEG, the cheaper the growth.
While Slater did not invent the PEG, he was certainly responsible for its popularity as a stock picking tool. As it was more widely used, particularly in the small cap arena, it became harder to identify shares that were undervalued on this basis; for a period in the 1990s, small cap growth shares were all the rage.
And since there are thousands of small cap companies out there, isolating those that might fit the criteria is basically a trawling exercise. We need to start with the numbers, and filter the full market to find out which shares are worth looking at in more detail. To help facilitate this process, Slater developed the Company REFS products — Really Essential Financial Statistics.
This focus on small caps was another feature of Slater’s investment style. His famous statement that “elephants don’t gallop” illustrates the idea that big companies rarely double in size, but small ones can.
He was also keen to focus on niche areas of knowledge; he doesn’t want to know a little about everything, he want to know everything about a few things. If those few things include a handful of neglected companies, the chances of his making money should be greatly increased.
“Investment is essentially the arbitrage of ignorance. The successful investor believes he knows something that other investors do not fully appreciate. There is very little that is unknown about leading stocks. In contrast…most leading brokers cannot spare the time and money to research smaller stocks. You are therefore more likely to find a bargain (with some ignorance to arbitrage) in this relatively under-exploited area of the stock market“.
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