I have started to re-read The Zulu Principle by the late, great Jim Slater. It was the first serious book on investment I read and helped my transition from what with hindsight was nothing more than share speculator to investor.
It has the advantage of being very manageable at just over 200 pages broken down into digestible sections, each with chapter-end key takeaways.
The book covers virtually all investment bases, from what to look for in a company’s management to seeking out companies before they hit the radars of brokers and the big fund houses.
Attributes such as a durable competitive advantage (underpinning future earnings and their reliability), strong cash flow with net cash or modest borrowings and a share price below the business’ long-term intrinsic value are all things we look for in companies we invest in.
The Zulu Principle is geared towards identifying growth stocks, looking for companies with positive momentum in both their financials and share price. Central to this is the concept of a PEG factor (the ratio of price/earnings to growth), which is one of the key investment metrics I value to this day.
Mr Slater rightly regards value plays and turnarounds with a dose of suspicion as they frequently turn out to be value traps. The takeaway here is to favour the better growth companies, even if this means paying a rating premium.
The book also introduces the concept of running profits and cutting losses which, once one can come to terms with admitting an error, is almost always the best course of action.
While it flies in the face of modern portfolio theory, Mr Slater’s suggestion that portfolios should be fairly concentrated affairs (he suggests no more than 12 holdings) has been adopted by some of the UK’s most successful investors. Similarly, not making brokers rich through over-trading is common sense.
One of the few valid reasons for selling a share is if the underlying company fundamentals have deteriorated and are unlikely to improve any time soon.
Perhaps the most pertinent piece of advice in the current market is not to allow a bear market to frighten you into taking patient money out of good long-term growth shares.
Despite traversing the 1929 crash, depression, an oil crisis and a world war, Mr Slater notes the rise in stock price of Coca Cola from $40 (£31.90) at its 1919 IPO to the equivalent of $1.8m at the time of publishing the book.
Nearly 30 years on, the principles in the book still hold and make essential reading for any stock picker, rookie or experienced.
Eric Burns is chief analyst for the SDL UK Buffettology and Free Spirit funds
