When we asked our subscribers to name their favourite book on investing, most responded with Jim Slater's Zulu Principle. This was interesting. Many of the world's most successful investors have been American; from Graham and Buffett to Greenblatt and O'Neil. Jim Slater on the other hand is an example of British home-grown talent. So today we'll explore whether a British investment strategy can work on the other side of the pond. Can investors use Slater's methods to beat the S&P 500?
What is Jim Slater's Zulu Principle?
Jim Slater first became famous in the 1960s, writing an investment column for The Telegraph under the pseudo name, Capitalist. Many investors may already be familiar with Slater's best selling book, The Zulu Principle (1992), where he lays out his strategy for identifying cheap stocks with dynamic earnings growth. To find investment opportunities, Slater uses a number of quantitative metrics, including the PEG ratio, which measures the trade-off between a stock's price, its earnings per share (EPS), and the expected growth of the company. He also uses qualitative criteria. For example, he likes companies with a competitive advantage, including excellent brand names, patents or an established position in a niche market.
There is a wealth of content explaining Slater's approach to investing, but in an a nutshell, he blends four factors: Quality, Value, Momentum and Growth. He likes good, cheap companies that are growing their profits and beating the market. How has the strategy performed over the last few months?
Can investors hunt or farm Zulu stocks?
Over the last few months, you could have done quite well by investing in a basket US stocks that qualify for Stockopedia's Zulu screen (ie. Zulu stocks). The screen has returned 17% since July, while the S&P 500 only appreciated by 3.4% - though it should be noted that there have been only 8 stocks qualifying, so the strategy has been quite concentrated and thus high risk.
The Zulu screen is a very forward looking screen that uses forecasts growth rates extensively in the calculation of the PEG, PE and EPS Growth metrics. In more bullish environments where brokers have generally been edging up their numbers it has done well, not only in the US, but also in…
