How I Became an Investor

I first became interested in investment when I was 32 and working as commercial director of AEC Limited. I was travelling extensively overseas and, during a visit to Spain, I contracted a viral illness, the after-effects of which lasted for several years. I began to worry that I might not be able to carry on with such a strenuous job. I decided that there was only one answer – I had to build some capital and an alternative source of income.

It was no accident that I chose Stock Exchange investment. Shares could be a profitable hobby and easily managed, while I still retained my job. The only problem was how to become relatively expert in the chosen specialist subject.

At the time there were two weekly investment magazines, The Stock Exchange Gazette and the Investors Chronicle, now both merged under one title. I decided to apply the approach that I subsequently named ‘The Zulu Principle’.

Click here for an explanation of The Zulu Principle.

To begin with I purchased two years’ back copies of both magazines, and during a convalescent period read through them page by page. I was convinced that the stockmarket winners of the past would have some common characteristics. If, with the benefit of hindsight, I could develop a formula based upon these characteristics, I was sure that I would be able to make my fortune.

I soon discovered that shares with a rising trend in earnings that also seemed to be on a relatively inexpensive multiple (earnings yield at the time) out-performed the rest of the market by a wide margin. A few failed to do so, and this made it essential to find out why and to devise some additional criteria that would help to erect a safety net under my selections.

During the following year I honed my system before putting it into practice – with astounding success. The market was in a bullish phase, which was obviously a helpful factor.

I wrote to Nigel Lawson, who was at the time the City Editor of the Sunday Telegraph. He thought my ideas had merit, and asked me to write a column each month under the pseudonym of ‘Capitalist’.

I explained in the first Capitalist article that I was looking for shares with an above-average earnings yield (the equivalent today would be a below-average price earnings ratio) coupled with above average growth prospects, and I outlined nine important investment criteria. It is interesting to look back on them, and I quote directly from the article:

  1. The dividend yield must be at least 4 per cent.
  2. Equity earnings must have increased in at least four out of the last five years.
  3. Equity earnings must have at least doubled over the last four years.
  4. The latest Chairman’s statement must be optimistic.
  5. The company must be in a reasonably liquid position.
  6. The company must not be vulnerable to exceptional factors.
  7. The shares must have a reasonable asset value.
  8. The company should not be family controlled.
  9. The shares should have votes.

The system worked – the Capitalist portfolio appreciated in value by 68.9% against the market average of only 3.6% during the same two year period from 1963 to 1965.

Since then my approach has been modified and refined as you will see under My Investment Philosophy.

 

Jim Slater