Investment Greats: Jim Slater

Published in Investing Strategy on 22 May 2009

From a top City player, to a small cap guru, Jim Slater has had a major influence on how the British public look at shares.

Forty years ago, Jim Slater was one of the top players in the City. Today, at the age of 80, he's still active in business, and not short of opinions on subject of investing.

Background

Slater originally qualified as a chartered accountant, but his column in the Sunday Telegraph, under the pen name 'Capitalist', brought him to public attention, running a portfolio that comprehensively outperformed the market.

Along with Conservative MP Peter Walker, Slater went on to establish the investment house Slater Walker Securities, which was a huge success in the 1960s and early 1970s, before crashing in the banking crisis of 1974. The firm came to be associated with the practice of asset-stripping -- acquiring businesses and selling off anything that was deemed to be surplus to requirements.

It was as the author of The Zulu Principle in 1992 that Slater again became a household name. That book, and his subsequent Beyond the Zulu Principle in 1996, popularised the idea of investing in small cap stocks, and the use of the PEG ratio to help identify targets.

The PEG ratio

The price-earnings-growth ratio is a rule of thumb that attempts to combine the elements of growth and value into one convenient measure. At its simplest, we divide the price/earnings ratio by the expected growth rate to arrive at the PEG -- the lower the PEG, the cheaper the growth.

Alan Oscroft went into this in more detail in his recent article, and ran a PEG filter on the current market to see what companies it found.

While Slater did not invent the PEG, he is certainly responsible for its popularity as a stock picking tool. As it was more widely used, particularly in the small cap arena, it became harder to identify shares that were undervalued on this basis; for a period in the 1990s, small cap growth shares were all the rage.

And since there are thousands of small cap companies out there, isolating those that might fit the criteria is basically a trawling exercise. We need to start with the numbers, and filter the full market to find out which shares are worth looking at in more detail. To help facilitate this process, Slater developed the Company REFS products -- Really Essential Financial Statistics.

Investment style

This focus on small caps is another feature of Slater's investment style. His famous statement that "elephants don't gallop" illustrates the idea that big companies rarely double in size, but small ones can.

He is also keen to focus on niche areas of knowledge; he doesn't want to know a little about everything, he want to know everything about a few things. If those few things include a handful of neglected companies, the chances of his making money should be greatly increased.

"Investment is essentially the arbitrage of ignorance. The successful investor believes he knows something that other investors do not fully appreciate. There is very little that is unknown about leading stocks. In contrast...most leading brokers cannot spare the time and money to research smaller stocks. You are therefore more likely to find a bargain (with some ignorance to arbitrage) in this relatively under-exploited area of the stock market".

He also combines some technical analysis methods with his fundamental research. In particular, he sees a place for relative strength as an aid to timing purchases, and he advocates cutting losses and running profits.

What does he like now?

Slater is clearly not a fan of diversification, but neither does he suggest dedicating all your assets to the small cap growth approach. In an interview with the Motley Fool's David Kuo in February, he proposed allocating just 15% of ones assets to these Zulu-style shares. Companies he liked in this category included Advanced Medical Systems (LSE: AMS), London Capital (LSE: LCG), and Education Development (LSE: EDD), but be aware that the prices have moved in the meantime.

At that time he had 30% in cash, in the expectation of continued turbulence in the markets, and recommends having at least 10% in gold, which he holds in the form of the Gold Bullion Securities (LSE: GBS) exchange traded fund.

Despite his liking for small companies, he recommends putting about 15% into leading international companies such as McDonalds and Exxon Mobil, and another 10% into global players in agricultural commodities, such as Monsanto and Potash.

His latest venture combines his interest in agriculture with his general bullishness on Brazil; Agrifirma, which is privately owned, is developing arable farmland from non-environmentally-sensitive scrubland. The team is largely composed of former directors of his Galahad Gold company, and is advised by Jim Rogers. They've also persuaded one of the top people from George Soros' Brazilian agri-business to come on board.

Expect to see Agrifirma's first crops harvested this summer, and the company to be floated on the stock market in due course.

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Comments

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Luniversal 22 May 2009 , 7:11pm

Big Jim may well be an effective and influential player among small caps today, and good luck to the old gent, but this account of his earlier fame in the 1960s and 1970s is far too admiring.

Read Charles Raw's monumental investigative work, "Slater Walker", to find out how he got his results: all the way from dealing while tipping to stuffing managed investment trusts with SW's failures, it was about rigging the market.

The extensive company law reforms of the 1970s and 1980s are his memorial as the once-acclaimed regenerator of British industry. He took the hint and has largely stayed away from PLC boards since then.

Then read Slater's own "Return to Go" (1978), for his excuses.

Terrapin1 22 May 2009 , 7:15pm
guykguard 28 May 2009 , 4:54pm

Reluctantly, I have to agree with Luniversal. Those of us who were around in the late '60s remember JS's ploys to emulate other big-time asset strippers like Jimmy Ling. They all had their day in the sunshine, but the shine didn't last long -- not that I personally take any pleasure in that.
As for PEG, who's kidding whom? I wonder what small cap PEG's JS & Co were staring at two years ago, and what reported P/Es for the same shares they're faced with now.
The PEG might afford some after-hours amusement for City traders but so might astrology or graphology or any other ology without a shred of sound evidence to support it. If it were a remotely sound financial measure, we'd all be using it and getting seriously rich as we did so. Gimme a break!

RobinnBanks 03 Oct 2010 , 6:20pm

And how much do elephants charge, on the Zulu principle?

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