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Jim Slater - The Father of The PEG Ratio

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Slater began his career as a chartered accountant and then moved into corporate managerial positions from 1953 to 1963 with three different U.K. manufacturing firms, the last of which was the prominent Leyland Motor Corporation. In 1964, he and Peter Walker founded an investment company called Slater Walker Securities. Through this firm, Slater became famous as a major player in the U.K. in aggressive corporate takeovers, building Slater Walker into a significant industrial and financial conglomerate, which, in 1969, evolved into an investment bank. Jim Slater is credited with inventing the price-earnings to earnings-growth ratio (PEG) and popularizing its use in America through his book, "The Zulu Principle" (1992).

Unfortunately for Slater, his successful career in investment banking came to an abrupt end with the collapse of Slater Walker Securities during the U.K.'s 1973-74 recession, leaving Slater personally bankrupt.

He fought his way back to solvency through private investing and launched a career as a financial writer. His widely read investment column, "The Capitalist," and an extremely popular investment advisory service called "Company REFS," which provided "really essential financial statistics" on all publicly traded U.K. companies, positioned Slater as an investment guru.

He became known as one of his country's most successful professional investors. A parallel career as an educator of individual investors and as an author of children's books flourished. In 2007, he remained active today as a major investor in a variety of small, growth-oriented companies.
The stock picking strategy that Slater employed developed from the columns he wrote under the pseudonym "Capitalist" in London's Sunday Telegraph, and which subsequently formed the basis for his "Zulu Principle" of investing. Slater's favored type of investment was the small growth company that was undervalued by the market - a so-called hidden gem. At the core of his methodology is his focus on finding small growth stocks before they hit the big time.

The main tool, which Slater invented and popularized to find this type of stock, was his pioneering price-earnings to growth ratio, or PEG. This equation combines growth and value investing. The formula compares a company's price-earnings ratio with its expected, or estimated, earnings per share growth rate.

Slater realized that a P/E ratio didn't mean that a stock was expensive as long as its earnings growth was high. For example, if company's stock was at a relatively high P/E of 30, but its earnings were expected to grow at a rate of 30%, it would have a PEG of 1, which is generally considered a very favorable value relationship. Slater pioneered the use of the PEG ratio, which today is widely used in investment analysis.
"Most leading brokers cannot spare the time and money to research smaller stocks. You are therefore more likely to find a bargain in this relatively under-exploited area of the stock market."
Highlighting what Slater thought was the inherent greater potential for the growth of smaller companies, he said, "I once compared a very large company with an elephant by making the comment that elephants don't gallop."


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