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IF YOU'VE never read British author Jim Slater’s book, The Zulu Principle, then don’t stress, as I am about to give you essence of its contents as a prelude to some application that I have made to local JSE shares using the principle.
It does have a curious title, which came to him after observing his wife reading an article in Reader’s Digest on the subject of Zulus. Within a few minutes she knew more than her husband did about Zulus. As Slater explains: "It occurred to me that, if she had then borrowed all the available books on Zulus from the local library, she would have become the leading expert in the county."
"If she had subsequently been invited to stay in a Zulu kraal (by an unsuspecting chief) and read about the history of Zulus at Johannesburg University for another six months, she would have become one of the leading experts in the world."
By applying a disproportionate effort to becoming an expert in a very narrow subject, you can use expertise to maximum advantage.
With investment, by concentrating on a specific focused approach, Slater reasons that you will become relatively an expert in your chosen area. Slater wrote: "It is only necessary to be six inches taller than the other people in a room to see above everyone’s heads. Applying The Zulu Principle helps you grow these extra six inches."
Essentially, Slater developed a set of rules for buying growth shares at the right moment and the right price. The key to finding those shares lies in the PEG (price/earnings to growth) ratio. Most would probably agree that the PEG ratio gives a more complete picture of share valuation than simply viewing the PE (price/earnings) ratio in isolation.
The rate at which a company will grow its earnings going forward is one of the largest factors in determining a shares intrinsic value. That future growth rate should be represented in everyday market prices in stock markets around the world. The P/E ratio shows us how much shares are worth compared to past earnings. Using the PEG ratio helps to get a good representation of historic earnings and future growth together. By dividing one by the other, Slater can score any company. Anything with a PEG over 1 is disqualified while anything under 1 is worth a much closer look.
Jim Slater filters his list of shares down by seeing it as essential that a company can show four years of growth. He generally looks for smaller, profitable companies with strong cash-flow, low debt and signs of strength in their shares. Slater does advocate that if the company has two years of good historic growth and that you can predict two years of good future growth, it also makes the grade. He prefers those that aren’t susceptible to cyclical trends, but can boast a competitive advantage, strong management and even signs of optimism in the chairman’s statement.
This investment style of Slater’s has been dubbed Growth at a Reasonable Price (GARP) and it was the primary investment style that was used by Guardbank when I worked there in the late 1990s. It was a philosophy that served them well for many years and I believe that it has been the right strategy to follow the JSE over the past few years.
One of the expressions that came out of the book, that really sat with me, was "Elephants don’t gallop".
Essentially, Slater prefers small-cap companies to large-caps, because he reasons that mammoth companies rarely double their market cap in a year.
If you did a quick scan of a number of shares on the JSE with low PEG ratios, you could come up the company I wrote about last week, namely Exxaro Resources Limited [JSE:EXX]. This is a company on a PE of just over 7. Exxaro would not fit the Slater test on four-year historic growth, as it saw a drop in earnings from 2011 to 2012. It saw a decent set of interim results for six months to June 2014 and might enjoy modest growth over the next two years, but it is also cyclical and maybe not small enough for Slater.
In fact, there are very few companies on the JSE that really make the grade. However, I think that I have found one on a low PEG, good historic and future growth, on a low PE, small, non-cyclical. But, I’m not telling you about the company now. Revisit this section tomorrow.
*Craig Martin is an entrepreneur with investments in information technology and financial services. He has experience as a discretionary portfolio manager, and has worked for ABN-Amro, Aurica Asset Management and Guardbank in the past. He currently invests for his own account and operates as an independent equity analyst.
* For more in-depth business news, visit biznews.com or simply sign up for the daily newsletter.
It does have a curious title, which came to him after observing his wife reading an article in Reader’s Digest on the subject of Zulus. Within a few minutes she knew more than her husband did about Zulus. As Slater explains: "It occurred to me that, if she had then borrowed all the available books on Zulus from the local library, she would have become the leading expert in the county."
"If she had subsequently been invited to stay in a Zulu kraal (by an unsuspecting chief) and read about the history of Zulus at Johannesburg University for another six months, she would have become one of the leading experts in the world."
By applying a disproportionate effort to becoming an expert in a very narrow subject, you can use expertise to maximum advantage.
With investment, by concentrating on a specific focused approach, Slater reasons that you will become relatively an expert in your chosen area. Slater wrote: "It is only necessary to be six inches taller than the other people in a room to see above everyone’s heads. Applying The Zulu Principle helps you grow these extra six inches."
Essentially, Slater developed a set of rules for buying growth shares at the right moment and the right price. The key to finding those shares lies in the PEG (price/earnings to growth) ratio. Most would probably agree that the PEG ratio gives a more complete picture of share valuation than simply viewing the PE (price/earnings) ratio in isolation.
The rate at which a company will grow its earnings going forward is one of the largest factors in determining a shares intrinsic value. That future growth rate should be represented in everyday market prices in stock markets around the world. The P/E ratio shows us how much shares are worth compared to past earnings. Using the PEG ratio helps to get a good representation of historic earnings and future growth together. By dividing one by the other, Slater can score any company. Anything with a PEG over 1 is disqualified while anything under 1 is worth a much closer look.
Jim Slater filters his list of shares down by seeing it as essential that a company can show four years of growth. He generally looks for smaller, profitable companies with strong cash-flow, low debt and signs of strength in their shares. Slater does advocate that if the company has two years of good historic growth and that you can predict two years of good future growth, it also makes the grade. He prefers those that aren’t susceptible to cyclical trends, but can boast a competitive advantage, strong management and even signs of optimism in the chairman’s statement.
This investment style of Slater’s has been dubbed Growth at a Reasonable Price (GARP) and it was the primary investment style that was used by Guardbank when I worked there in the late 1990s. It was a philosophy that served them well for many years and I believe that it has been the right strategy to follow the JSE over the past few years.
One of the expressions that came out of the book, that really sat with me, was "Elephants don’t gallop".
Essentially, Slater prefers small-cap companies to large-caps, because he reasons that mammoth companies rarely double their market cap in a year.
If you did a quick scan of a number of shares on the JSE with low PEG ratios, you could come up the company I wrote about last week, namely Exxaro Resources Limited [JSE:EXX]. This is a company on a PE of just over 7. Exxaro would not fit the Slater test on four-year historic growth, as it saw a drop in earnings from 2011 to 2012. It saw a decent set of interim results for six months to June 2014 and might enjoy modest growth over the next two years, but it is also cyclical and maybe not small enough for Slater.
In fact, there are very few companies on the JSE that really make the grade. However, I think that I have found one on a low PEG, good historic and future growth, on a low PE, small, non-cyclical. But, I’m not telling you about the company now. Revisit this section tomorrow.
*Craig Martin is an entrepreneur with investments in information technology and financial services. He has experience as a discretionary portfolio manager, and has worked for ABN-Amro, Aurica Asset Management and Guardbank in the past. He currently invests for his own account and operates as an independent equity analyst.
* For more in-depth business news, visit biznews.com or simply sign up for the daily newsletter.
