The Zulu Principle

Slater, a British financier who had run the conglomerate Slater Walker before its collapse, wrote this as a practical guide to selecting growth shares. The title comes from his observation that a person who reads one article about Zulus knows more about them than almost everyone around them, and that concentrated study of a narrow area produces a disproportionate advantage.

The method is a screen for growth companies at reasonable prices. Slater popularised the price-earnings growth factor, obtained by dividing the price to earnings ratio by the forecast earnings growth rate, and argued that a company with a ratio below one offers growth that the price does not reflect. He combined this with additional criteria: a record of at least four years of increasing earnings per share, positive cash flow exceeding earnings, low debt, strong relative share price strength, a competitive advantage he could identify, something new in the business, and directors buying shares.

He argued that private investors should concentrate in a small number of holdings in a narrow area they study intensively, because that is where an individual can outcompete institutions, and that they should avoid trying to be broadly informed.

The approach was influential in Britain and the price-earnings growth factor entered general use.

The main problem is that the growth measure depends on forecast earnings growth, which is exactly the number that is least reliable, and the ratio can be manipulated by choosing a favourable forecast horizon. Slater's own history at Slater Walker, which grew through acquisition and collapsed in the mid-1970s secondary banking crisis, is relevant context that the book does not dwell on. The screen has been widely applied since and its performance depends heavily on the earnings forecast quality.