The Zulu Principle | Jim Slater


Published in: 2008


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Jim Slater was the former auditor and controller who in the 1960s introduced “asset stripping” and “takeover battles” to the London Stock Exchange. During the happy 1960’s and until the stock market crash in 1973, the stock market value of his acquisition platform Slater Walker increased 100-fold. In the aftermath of the stock market crash, Slater lost everything, after which he started again investing privately and wrote some books – one of them being “The Zulu Principle”.  

THE ZULU PRINCIPLE. In short, the principle says that if you choose a narrow subject and study it carefully, you quickly become one of the most knowledgeable in the field. The name comes from an example where his wife read an article about the tribe “Zulu” in South Africa. If you read an article in the newspaper, order some books on the subject and then travel to South Africa to meet them, you are quickly one of the country’s most familiar with the subject.

“It is only necessary to be six inches taller than the other people in a room to see above everyone’s heads. Applying the Zulu Principle helps you grow those extra six inches.”  

ELEPHANTS DO NOT GALLOP. Slater advocated investments in smaller companies. The reason’s were several; the largest institutions are not there and small companies, precisely because they are small, have better growth opportunities than the large ones. For the past 50 years (the book was written in 1992), small companies  outperformed the market by 3.8% annually. However, they are often “out of fashion” for periods of up to several years.

HAVE A SYSTEMATIC APPROACH. You can beat the market by being systematic. But you must not change strategy just because it underperformed a year or two. Slater’s “Zulu Principle” is a growth strategy based on the PEG (price / growth). The criteria are briefly described: (1) a PEG ratio below 0.75, (2) a P/E ratio below 20, (3) EPS growth above 15%, (4) positive relative strength to the market, (5) ROCE> 12% and (6) a market capitalization between £20-100m. In addition, he wanted to see low indebtedness, a dividend, the opportunity for a change in perception (we want to buy before a stock becomes a growth darling) and a positive-sounding chairman’s words.

TIMING AND MOMENTUM. Slater believes that a share’s relative strength to the stock market is of great importance when timing the purchase. The stocks that perform best tend to behave like winners already at the time of purchase – that is, have rising share prices. Jim O’Saughnessy, who examined 43 years of data from the Compustat database, found that of the ten highest-yielding strategies, all contained elements of relative strength to the market over the past year.

PROFITABILITY – ROCE. A company’s ROCE (return on capital employed) should be compared with the cost of borrowing capital. If the ROCE is significantly higher, additional borrowing will result in higher EPS, if ROCE is lower, increased borrowing will result in lower EPS. Profitability determines the company’s opportunities for capital raising and expansion. It is important to adjust for intangible assets when calculating ROCE.

INDEBTEDNESS – GEARING. Slater prefers to see a relatively low level of indebtedness. Net gearing in excess of 50% can cause problems, especially if a large part of the liabilities are short-term. A heavily indebted company is likely to be fully invested and operationally committed, and thus much more vulnerable than an ungeared company. In addition to the security that redundant funds provide, it also increases the opportunities for opportunistic business in the event of a changed business climate – an option that indebted companies, which may be forced to make forced sales, do not have.

DON’T BE CHEAP ON THE SPREAD. Slater knew that he was often one of the major players in the small company shares he traded in. If you are the largest in the order book, you cannot be so pricey if you want to get through with some transactions. He therefore used to “pay up” a little at the time of purchase and give a little extra discount at the time of sale. This is the price for trading in small company shares, a price that is more than offset by a carefully investigated case.

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