If you were going into battle for growth stocks, you'd want Jim Slater by your side.
I suspect most people are first attracted to buying individual shares by the explosive potential of growth stocks.
Spare cash seems to be a magnet for newspaper articles, stock price charts and friends who point out that if you'd put £10,000 into WonderCo Ltd 20 years ago, you'd be a millionaire today.
Unfortunately, finding WonderCo 2 -- The Sequel is more difficult than picking winners from the history books. A new investor can get excited about any number of companies, but all too often your small caps become micro caps and the next Microsoft is selling its fancy office furniture on eBay.
If you're unlucky, you get a chip on your shoulder and complain the stock market is a racket.
If you're lucky, you discover index investing and burn up your anger elsewhere, perhaps by taking up kickboxing.
But if you're really lucky, you read The Zulu Principle by Jim Slater and you learn where you've been going wrong all along.
Bringing method to the madness
Slater isn't a showy writer, but throughout The Zulu Principle he gets across complex ideas in just a few words. It makes him an excellent teacher.
The book's title -- referencing how Slater's wife could easily know more about Zulus than almost anyone in England, just as you can with your chosen shares -- is almost as famous as the PEG ratio he popularised.
Yet Slater's enduring contribution is in outlining how and why he combines both the story and the number-based aspects of stock picking in a systematic fashion.
That may sound uncontroversial, but Slater's early success was more about his method than his message.
Recovering from illness in the early 1960s, he went through two years of back issues of the Investor's Chronicle for a way to predict share price growth.
Rising earnings combined with a low P/E ratio stood out for him, and after his method turbo-charged his own portfolio, he wangled a column in The Telegraph in 1963 called 'The Capitalist', which delivered a 68.9% rise over two years, against 3.6% for the market.
The Zulu Principle followed, although not until 1992 -- and after Slater had made his name with a swashbuckling City career.
PEG just one leg
I wasn't investing at the time, but anecdotally I've heard the popularity of Slater's method following the publication of The Zulu Principle -- particularly the focus on the PEG rating -- soon 'outed' all likely candidates and made the technique unreliable.
But The Zulu Principle is about more than one ratio, which is why it can teach a failed 'Blue Sky' investor to set his sights on more realistic horizons.
Slater looks for nearly a dozen criteria to be satisfied in searching for Zulu shares. Doing so, he substitutes growth company buzz with a sieve for stocks that have proven themselves in the past and have a promising future -- while putting a cap on the price he'll pay for them.
The criteria:
1. Positive growth rate in earnings per share in at least four out of the five last years
2. A low P/E ratio relative to the growth rate (the famous PEG rating)
3. The chairman's statement must be optimistic
4. Strong liquidity, low borrowings and high cash flow
5. Competitive advantage
6. Something new
7. A small market capitalisation
8. High relative strength of the shares compared with the market
9. A dividend yield
10. A reasonable asset position
11. Management should have a significant shareholding
As a checklist it's hard to beat, and it would immediately rule out most ephemeral growth stocks.
And once you've digested Slater's message, you can tweak the criteria to fit your own convictions. Whether you look for net cash, family ownership, or a particular hurdle for return on equity, you'll benefit from working it into a systematic approach.
Ups and downs
You might even decide another investing style is better for you -- along with an excellent section on bull and bear markets, The Zulu Principle includes creditable introductions to cyclicals, turnarounds, value shares and also investing in shells, which was quite popular a decade or two ago.
This brings me on to the greatest weakness of the book; just like Lynch in One Up On Wall Street, Slater talks in the present tense about a market long gone. It's more irksome in The Zulu Principle though, perhaps because the companies are British and so less abstract, or maybe because the text is accompanied by corny old photos of managing directors prised out of an Old Boys' Smoking Club membership roster from the 1970s.
The section on creative accounting is similarly excellent in principle but in practice hugely out-of-date. And again like Lynch, 1992-era Slater has never heard of the Internet.
It's also noticeable how not a few of Slater's darlings have gone awry since The Zulu Principle was printed.
In his defence, Slater does suggest you sell your Zulu shares when the growth is no longer reasonably priced (a PEG of around 1.2).
Doing so would surely have prematurely kicked you out of many of the long-term multibaggers whose steep share price graphs grace the book and celebrate the method, however.
Here be monsters
Incidentally, even if you're a sworn index investor who wouldn't dream of picking stocks or a curmudgeonly value investor, there's still a place on your bookshelf for Jim Slater.
While researching this article, I discovered the fearsome corporate raider and millionaire investor is the same Jim Slater who wrote the A.Mazing Monsters books of 30 years ago.
Illustrated by his son Christopher when he was just 10, they sold over three million copies, and have been recently republished, according to what seems to be the official website.
Who knows, perhaps Slater has ferreted the odd Zulu or two into the A. Mazing Monster books, too?
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