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Z is for Zulu Principle – The Elite Investor Club’s A – Z of Investing


Here we are at the final letter in our special alphabet, the A to Z of Investing. And yes, I’ve even found an important lesson to learn with one of the most challenging letters. Because Z stands for the Zulu Principle. For many people the word Zulu might conjure up an old Michael Caine film about the tribe of thirty thousand warriors in South Africa. If you’re a policeman you might use zulu to confirm the letter z on a car number plate. But I have a far more interesting use of the word to share with you that could make you very wealthy indeed. I want to tell you about the Zulu principle first articulated by investment guru Jim Slater more than twenty years ago. He coined the name after watching how his wife went about learning all she could about the Zulu tribe in Africa. Because the subject was so narrow, by studying it on depth she quickly became a global expert who could pit her knowledge against anyone on the planet. Jim decided to apply the same approach to investing. Focus all your energy on one specific sector of the market and study it in depth. Malcolm Gladwell reckons that it takes ten thousand hours of study to become an expert in any topic. Imagine what you could know about one area of investing after that amount of research. In Jim’s case he decided to focus on small companies that have been under valued by the market. If the brokers and analysts are not following a stock, you are more likely to pick up a company with great potential at a bargain price while it is still flying under the radar. To help him find these stocks Jim developed a number of criteria to screen out the dross and point him in the direction of the cream of the crop. He looks for a low price earnings ratio relative to growth, strong cash flow and manageable gearing, a significant competitive advantage which will almost certainly lead to strong return on capital employed and good operating margins relative to the industry the company operates in. He likes to see directors buying rather than selling shares in the company, a market capitalisation in the thirty to two hundred and fifty million pound range and ideally the first signs of a dividend being paid to shareholders. Finally, he looks for something new that could trigger a growth spurt like a new CEO or a new product launch. That may sound like a lot of research. So the sixty four thousand dollar question is, does it work? From the results I’ve seen, I’d have to say yes. Irish stockbrokers Merrion back-tested a Zulu Principle portfolio of stocks over nine and a half years from October 1994 and reviewed it every six months. In October 2004 they concluded that a Zulu Principle portfolio would have delivered a compound annual growth rate of twenty four point five per cent compared to just four point four per cent for the FTSE All Share index. The good news is you don’t have to do all the leg work yourself. You can apply a Zulu Principle stock screener on sites like Stockopedia and it will produce a list of shares that meet the criteria. Don’t be surprised if it’s a small list. But, on the subject of returns on small stocks, Andrew Craig shared a startling statistic at the twenty fifteen Elite Investor Summit. He recently spoke with a fund manager who specialises in smaller companies and had just completed some research with two London Business School Professors. They found that the annualised return on London-listed UK smaller companies from 1955 to 2015 was no less than 16.8%. Compound those returns across the decades and a modest investment would make you a multi millionaire. You see, there are loads of ways to achieve financial independence. I’ve covered twenty six of them in this A to Z series. What matters is that, once you’ve done your research and decided on a strategy, you develop the discipline to stick with it and to continue regular investing. Whether you take Andrew Craig’s broad diversification strategy expressed in How To Own The World or the narrow focus on small companies in Jim Slater’s Zulu Principle, recognise the commonality. The reason these people become successful is as much to do with stickability and calm emotions as it is anything to do with the specific strategy. Do get in touch on if you have any questions about what you’ve learned in the A to Z of investing. And do share the links with anyone you care about who wants to start on the journey to financial independence. My name’s Graham Rowan and I’m delighted that you’ve made it to the end of the alphabet. Please reward yourself with a drink of whatever you normally celebrate with. I’m off for a well earned Malbec.