Beyond the Zulu Principle

Slater wrote this as an extension of The Zulu Principle, developing the growth share selection method in more detail and adding material on other approaches.

The core method is unchanged. The price-earnings growth factor, dividing the price to earnings ratio by the forecast earnings growth rate, identifies growth companies whose price does not reflect their expected growth. Slater requires a record of consecutive earnings increases, cash flow exceeding earnings, low debt, strong relative price strength, a competitive advantage he can identify, something new in the business, and directors buying shares.

The additional material covers areas the first book treated briefly. He extends the treatment of cash flow analysis and of the balance sheet checks that identify companies whose reported growth is not real. He covers the identification of the smaller companies where the method works best, since institutional coverage is thin and mispricing is more likely. He adds material on other approaches including asset situations, cyclicals, turnarounds and shells, with the argument that each requires different criteria. He also covers portfolio management, position sizing and when to sell, which the first book addressed less.

The general position remains that a private investor should concentrate in a narrow area studied intensively rather than diversifying across what they do not understand.

The same limitation applies as to the first book: the growth measure depends on forecast earnings growth, which is the least reliable input available, and the ratio can be made to look attractive by selecting a favourable forecast. The method also works best in small companies where liquidity is limited. Slater's own history at Slater Walker, which collapsed in the mid-1970s, is context readers should know.