How to invest like Jim Slater: Lessons from a shifting strategy

If you open an account using links which have an asterisk, This is Money will earn an affiliate commission. We do not allow this to affect our editorial independence.

History isn’t as precise as we imagine. It’s pieced together from scraps and fragments, which is why some names fade over time. One of them is Jim Slater.

As the BBC once wrote, 'The name probably means nothing to anyone under 50, but in the 1970s Jim Slater was a truly famous businessman'.

Slater’s 1977 autobiography Return to Go is long out of print, but it captures the rise and fall of a remarkable financier. Fifteen years later, he wrote The Zulu Principle, a classic investment guide that distilled his hard-won lessons.

Read together, the two books chart the evolution of an investor, from ambition and excess to philosophy and discipline.

Jim Slater started investing around 1959, before the internet and before personal computers.

The idea of backtesting an investment strategy was out of the question, so Slater devised a clever workaround.

He bought two years’ back issues of The Investors Chronicle and the Stock Exchange Gazette and reviewed the share recommendations.

With the benefit of hindsight, Slater was able to identify traits that were present before periods of strong price performance.

The process helped Slater separate genuinely good recommendations from tips that turned out to be duds.

Slater developed and refined his own investment philosophy. He described himself as an ‘earning situations’ specialist, but in many ways, he focused on turnarounds. In Return to Go, he said:

'I was looking for shares which, following a bad period, had a steadily rising earnings trend.'

Slater’s theory was that turnaround companies tended to stay undervalued because the market had become jaded after years of poor performance.

'Quite often after a period of losses it would take a long time for the stock market to forgive and forget, so the rating given to these companies was not high enough in relation to their recent earnings trend.'

Slater complemented this investment theory with a clear set of well-defined rules.

Slater listed these rules in 1963, writing an investment column in The Sunday Telegraph under the pseudonym of ‘Capitalist’.

Rule 1 ensured the company was undervalued and generating enough cash to pay a dividend. Rules 2 and 3 focused on strong earnings growth, while Rules 5 and 7 ensured the company had a healthy balance sheet.

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 reasonable 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.

Slater also applied criteria for the price-to-earnings (P/E) ratio. This was essentially a prototype GARP strategy (growth at a reasonable price).

'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.

Slater ran a ‘ghost portfolio’ while writing his ‘Capitalist’ column. In Return to Go, he reflected on the results:

'The "Capitalist" portfolio did appreciate in value by 68.9 per cent against a market average of only 3.6 per cent during the same period.'

It’s been sixty-six years since Slater wrote his ‘Capitalist’ column. Today, we’re better equipped to simulate the performance, using data from 2015-25.

The strategy performed better in 1963-65, when Slater’s portfolio appreciated by nearly 70 per cent.

Back then, information was harder to access. Fewer investors used quantitative data.

The market was less efficient, meaning it was easier to find mispriced stocks.

An investment strategy which worked in the 1960s may not work in the 2020s.

Slater managed this problem by reinventing himself, but before we get onto that… let’s go over the simulation in a bit more detail.

The original criteria were adapted slightly: firstly, to make them consistent with the rules available in Stockopedia’s screener; secondly, because the investment environment is different.

Slater ran the ‘Capitalist’ portfolio at the tail-end of the post-war economic boom, when Prime Minister Harold Macmillan told voters, ‘You've never had it so good’. Slater later reflected, ‘The market was in quite a bullish phase… This obviously helped.’

Today’s economic climate is less favourable, what with pandemics, inflation and geopolitical crises. I was less stringent when running the simulation, particularly around earnings growth.

The following cut-offs were used:

● The dividend yield is at least 2%; # My interpretation of Rule 1 above

● An EPS CAGR rate of at least 20% (over prior 3 years); # As per Rule 2

● EPS growth streak of at least 3 years; # As per Rule 3

● The current ratio is at least 1, indicating a reasonable liquid position; # As per Rule 5

● The assets-to-equity ratio is 350 or less; # As per Rule 7

● The P/E ratio must be below 15; # As per Slater’s criteria for the price-to-earnings

We can make a few observations. The number of holdings in our simulation dropped significantly after Covid.

This was likely due to slower earnings growth during the pandemic and the Russia-Ukraine War. Higher interest rates also made it harder for companies to meet Slater’s strict liquidity and balance sheet requirements.

Many will argue that Slater was just lucky. After all, in a large enough group, a handful of coin-flippers are bound to land ten heads in a row purely by chance.

This was precisely the point Warren Buffett made in The Superinvestors of Graham-and-Doddsville.

He imagined a national coin-flipping contest in which 225million Americans each flipped a coin once a day.

After ten days, probability dictates that about 215 people would have flipped ten consecutive heads — not due to skill, but to random luck.

But then Buffett introduced a key insight: what if all the successful coin-flippers — or investors — had attended the same school? In that case, he suggested, ‘you might want to see if you could identify concentrations of unusual characteristics that might be causal factors.’

In other words, if the winners all shared a common background or approach, it would be worth exploring whether something more than chance — a method or philosophy — was behind their success.

Jim Slater’s approach, like those of the ‘superinvestors’ from Graham-and-Doddsville, clearly does not rely on random selection.

Instead, it focuses on stocks that meet specific, targeted criteria. We can clearly see Slaterville in the top-right corner of the charts.

Investors applying the ‘Capitalist’ criteria would have gained exposure to distinct segments of the market — the growth, quality, and value segments in particular.

Read More

This approach would have ensured stocks were exposed to various factors that drive share price returns.

● One key factor is value — historically, stocks that are relatively inexpensive have outperformed those with high price tags. Slater gained exposure to value by hunting for companies with a low P/E and a high yield.

● Another factor is quality — firms that are consistently profitable, financially sound, and generate strong cash flows typically deliver better returns than companies that are unprofitable, heavily indebted, or struggling to maintain liquidity. Slater gained exposure to quality by hunting for stocks with strong balance sheets.

In 1992, Jim Slater introduced a new set of investment criteria in his book The Zulu Principle.

Our Zulu GuruScreen, inspired by Slater’s approach, applies the following investment filters:

1. PEG ratio below 0.75 — indicating growth at a reasonable price;

2. Price-to-Earnings (P/E) ratio under 20 — avoids overvalued stocks;

3. Earnings per Share (EPS) growth over the past year above 15% — selects companies with strong recent growth;

4. 1-year relative strength greater than 0% — focuses on stocks outperforming the market;

5. Return on Capital Employed (ROCE) above 12% — ensures efficient, profitable use of capital;

6. Market capitalisation between £20m and £1b — targets small- to mid-cap growth opportunities.

We simulated the performance of the Zulu approach between 2011 and 2025. While it didn’t quite match the returns of Slater’s Capitalist portfolio (1963–65) it still delivered solid gains… over a much longer time period.

By adapting his approach, Slater was able to sustain a strong performance over time. But what exactly did he change?

First, he used different metrics. In the early 1960s, Slater used a range of separate metrics to identify undervalued growth stocks — including the yield, the P/E ratio, and EPS growth.

By 1992, he introduced a composite measure: the PEG ratio. This divides a company’s P/E ratio by its EPS growth rate. A lower PEG suggests that the stock could offer growth at a low price.

Slater also increased his exposure to two factors that drive returns: size and momentum.

He started to focus on companies within a specific market cap range, deliberately targeting small, dynamic growth stocks.

He summarised his thinking with a one-liner, ‘Elephants don’t gallop’ — i.e. bigger companies have less scope to deliver rapid earnings expansion.

It’s also important to highlight that Slater introduced momentum into his strategy. Momentum is the idea that stocks with strong recent performance tend to continue rising. Slater started to target companies with positive relative strength — i.e. companies that were beating the market.

While Slater consistently targeted Quality-Growth shares, he increased his exposure to Quality-Momentum over time.

To pivot toward momentum, Slater had to overcome certain cognitive biases. He was a trained accountant and his early emphasis on liquidity and balance sheet strength was perhaps a reflection of the classic ‘man with a hammer’ syndrome.

If to the man with a hammer, everything looks like a nail, then to the investor who is an accountant, every stock is a balance sheet.

He initially sneered at the idea that future returns could be predicted by simply looking at historical share prices. In 1992, he wrote: 'About twenty years ago, I observed that chartists usually had dirty raincoats and large overdrafts… Even now I do not know many rich chartists.'

Over time, Slater’s view changed, apparently accepting the wisdom of crowds — i.e. the idea that the market’s collective judgment can be more accurate than that of an individual investor.

'I give technical analysis much more credence than before…Other investors may be selling after becoming aware of problems that you have not yet identified… If the shares are not keeping up with the market, you should be on red alert.'

Readers hoping to invest like Slater can follow these key steps:

● First, align with the factors that drive returns. Slater consistently exposed his portfolio to value, quality, and growth, and over time, he incorporated size and momentum into his strategy.

● Second, adapt with the times. Slater managed a successful portfolio from 1963 to 1965, achieving strong results that we were unable to replicate in the 2020s, using similar rules. Slater recognised the need to evolve, especially by revising his views on momentum, with the result that his 1992 approach generated solid returns (see below).

● This leads to the third requirement for long-term success: the willingness to question and overcome our own biases. As a trained accountant, Slater initially favoured balance sheet strength and was sceptical of price trends, but he ultimately overcame these biases and targeted shares beating the market.

Feel free to explore Stockopedia’s Guru Screens, designed to align with Jim Slater’s Zulu Principle strategy.

As a special offer, This is Money readers can get 25 per cent off a Stockopedia membership.