Money and Finance
When I was working in London a few years ago, I would often hear about a well-regarded investing book called The Zulu Principle by Jim Slater. As an American investor, I'd never come across the book and was curious to figure out what it was all about.
Above all else, the "Zulu Principle" is about focusing as an investor. Indeed, the name itself came to Slater after his wife read a four page article on the Zulu tribe in Readers Digest and he concluded that, from that short article alone, his wife knew much more than he did about the Zulus. Taking it a step further, he reckoned that if she then went to the library and read more about the Zulus, she'd probably know more than anyone in town. If she lived in South Africa to study the Zulus for six months, she'd know more than anyone else in Britain.
In other words, by focusing on a niche, one can more easily become a leading expert on the subject than if they tried to understand everything. This is consistent with Buffett's advice to only invest in companies within your circle of competence.
While Slater discusses a number of investing approaches in the book, he believes that individual investors should spend most of their time researching smaller companies where there are fewer institutional investors to compete with and where an information edge is more likely to be obtained.
One of the things I particularly like about Slater's approach is that his investing process is simple, consistent, and repeatable.
Here are some of the criteria that he looks for in a new investment. The first five he considers mandatory while the latter six he considers to be added "protection."
If starting from scratch, I'd calculate the company's "sustainable growth rate" (discussed here) to determine what growth rate the company is capable of achieving. Also read through conference call transcripts and any investor presentations to see if management has an earnings growth target.
Slater also recommends a focused portfolio of 10-12 stocks with a maximum 15% invested in any one stock. By owning fewer stocks, it stands to reason that you'll become more expert in those companies than others in the market.
While U.S. investors may struggle with some of the U.K.-focused terminology and some dated company examples in the book, The Zulu Principle is definitely worth a read. I've added it to my recommended reading list.
Finally, here are a few good quotes from the book:
Stay patient, stay focused.
Best,
Todd
Follow @ToddWenning
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Money and Finance
The Benefits of a Focused Investing Approach
When I was working in London a few years ago, I would often hear about a well-regarded investing book called The Zulu Principle by Jim Slater. As an American investor, I'd never come across the book and was curious to figure out what it was all about.Above all else, the "Zulu Principle" is about focusing as an investor. Indeed, the name itself came to Slater after his wife read a four page article on the Zulu tribe in Readers Digest and he concluded that, from that short article alone, his wife knew much more than he did about the Zulus. Taking it a step further, he reckoned that if she then went to the library and read more about the Zulus, she'd probably know more than anyone in town. If she lived in South Africa to study the Zulus for six months, she'd know more than anyone else in Britain.
In other words, by focusing on a niche, one can more easily become a leading expert on the subject than if they tried to understand everything. This is consistent with Buffett's advice to only invest in companies within your circle of competence.
While Slater discusses a number of investing approaches in the book, he believes that individual investors should spend most of their time researching smaller companies where there are fewer institutional investors to compete with and where an information edge is more likely to be obtained.
One of the things I particularly like about Slater's approach is that his investing process is simple, consistent, and repeatable.
Here are some of the criteria that he looks for in a new investment. The first five he considers mandatory while the latter six he considers to be added "protection."
- A positive growth rate in earnings per share in at least four of the last five years.
- A low price/earnings ratio relative to its growth rate. Look for a PEG ratio under 0.75, ideally under 0.66.
- An optimistic chairman's statement. If management's commentary about the coming year is negative or cautious, don't buy.
- Strong liquidity, low borrowings and high cash flow.
- A substantial competitive advantage.
- Something new. Does the company have a new product or service that the market may not fully appreciate yet?
- A small market capitalization. Are large investors overlooking or unable to buy this stock?
- High relative strength of the shares. Only buy a growth stock within 15% of its 52-week high.
- A more than nominal dividend yield.
- A reasonable asset position.
- Management should have a significant shareholding.
If starting from scratch, I'd calculate the company's "sustainable growth rate" (discussed here) to determine what growth rate the company is capable of achieving. Also read through conference call transcripts and any investor presentations to see if management has an earnings growth target.
Slater also recommends a focused portfolio of 10-12 stocks with a maximum 15% invested in any one stock. By owning fewer stocks, it stands to reason that you'll become more expert in those companies than others in the market.
While U.S. investors may struggle with some of the U.K.-focused terminology and some dated company examples in the book, The Zulu Principle is definitely worth a read. I've added it to my recommended reading list.
Finally, here are a few good quotes from the book:
- "Elephants don't gallop."
- "Investment is essentially the arbitrage of ignorance."
- "Do not go bottom-fishing - you can drown that way."
- "If you are intent upon turning a stampede, you have to wait until the cattle are tiring; otherwise you can be trampled underfoot."
Hard to believe, but this is the 100th Clear Eyes Investing post. Thank you very much for reading!
What I've been reading/watching this week:
- The Red Queen Effect -- Farnam Street
- Why you shouldn't buy stocks from the 52-week low list -- Howard Lindzon
- Just look the other way -- Morgan Housel
- Dividends are the most overlooked part of investing -- Crossing Wall Street
- Good times teach only bad lessons -- Reformed Broker
- The perils of market timing -- Brooklyn Investor
- When perfection is a problem -- Abnormal Returns
- The big cost of running an active mutual fund -- A Wealth of Common Sense
- Professor Aswath Damodaran's updated financial markets data for 2015 -- Damodaran Online
Book I'm currently reading:
- The Last Lion: William Spencer Churchill: Visions of Glory (1874-1932)
Best,
Todd
Follow @ToddWenning
- Why You Should Probably Own Fewer Stocks
I think the average person could know three or four or five companies very well. They could lecture on those three or four or five companies, and if one or two of 'em becomes attractive, they buy 'em...You have to know the story. - Peter...
- A List Of Good Investing Books
Must-Haves for Serious Investors Benjamin Graham. The Intelligent Investor. The value investor's bible. Make sure you get an edition with Jason Zweig's commentaries.Peter Lynch. One Up on Wall Street. The retail investor's bible. Lynch's...
- The Importance Of Keeping A Good Watchlist
When Warren Buffett says of an investor's commentaries, "When I see memos from (him) in my mail, they're the first thing I open and read. I always learn something, and that goes double for his book," that's a pretty good sign that you...
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