Business book overview: Zulu Principle (Jim Slater)

A great business book

he Zulu Principle by Jim Slater is required reading for any would be investor. In the following article I identify the key points made in the book. This is no substitute for reading the book yourself:
I recently finished reading the Zulu Principle by Jim Slater. Overall, it was a very good. Jim sets out very clearly what an individual investor should be looking for when investing in stocks and shares. I strongly recommend the book to anyone looking to start a stock portfolio or simply looking to learn a little about the world of investing in the stock market.

What is the Zulu Principle?

The Zulu Principle outlines eleven major points of consideration that an investor should make when assessing a Company in which to invest. The basic rules of the Zulu Principle are:

1. Growth in earnings - over the past four to five years the Company should demonstrate consistent growth in earnings of about 15% per annum.

2. Modest price to earnings ratio relative to growth. This ratio should be between 0.3 to 1. What it means is that the current price is less than the current earnings grossed up by the prospective growth rate.

3. Optimistic Chairman's Statement in the latest set of financial statements. Before investing you should read the financial statements - at least the financials of the latest set of results and the Chairman's Statement. You can normally get a feel for how the Chairman views their own Company from that statement and factor that view in your investment decision. 

4. Self financing - the Company must be able to sustain itself and grow using its own cash rather than risk needed to come back to ask the market for more money via a rights issue. Look for Companies whose operating cash flow is positive and has demonstrated growth over the past.

5. Competitive advantage - there must be something unique about the stock. For example, a brand, patent, legislation or market dominance. A good sign of competitive advantage is that operating margins should be between 7.5% - 20% and return on capital employed should be greater than 20%.

6. Something new - the Company should be doing something different. This could be a new technology, a new CEO, new products, or new industry events. This ties in with competitive advantage.

7. Market capitalisation. For decent returns the Zulu Principle suggests that you should look for Companies with a market capitalisation of less than £250million. Given inflation since Jim wrote the Zulu Principle I would suggest you inflate this to £300million.

8. Strength of market price - the price of the stock should be within 15% of the maximum price met within the past two years. It should be a concern to any prospective buyer if the market price is severely down on prior years. You should definitely investigate the reasons behind such an occurance.

9. Dividend yield should be between 1.5% - 4%. Consistent dividend payments demonstrates that the Company has enough cash to provide a return to investors.

10. Asset position - net assets of the Company should be greater than 25% of the market capitalisation. This reflects a more established business whose price/ value is not overinflated.

11. Management shareholding should be at least 20% of the Company. This demonstrates the commitment and incentive of management.

Whatever your knowledge of stockmarket the Zulu Principle is a straightforward explanation of how to invest. It is well worth a read.

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