What's Jim Slater's recipe for success?

Jim Slater's bias towards small, fast-growing and under-rated firms has seen his portfolio average returns of 24.5% a year between 1994 and 2004. What are the secrets of his strategy?

Jim Slater is probably Britain's most famous private investor, says Fool.co.uk. He rose to prominence in the 1960s with a share-tipping column that focused on small, fast-growing and underrated firms a bias that propelled his portfolio to a 70% gain between 1963 and 1965. The overall market rose just 3.6% over the same period. And this was no flash in the pan: Slater's approach returned 24.5% a year between 1994 and 2004, while the overall market advanced by an annual 4.4%, notes Kathryn Cooper in The Sunday Times. So how does it work?

Jim Slater's strategy: find cheap growth stocks

lSlater concentrates on small firms as "elephants don't gallop" big firms are unlikely to grow very fast. To find a cheap growth stock that should benefit from a rerating, investors should look at the price to earnings growth ratio (or PEG, available on www.digitallook.com or www.advfn.com). This is the forecast price/earnings ratio divided by the forecast earnings growth ratio. A PEG below one suggests a company's growth prospects are undervalued, giving investors a "margin of safety", Slater told Cooper. A PEG above one means the market is paying too much for future earnings growth.

Jim Slater's strategy: look at earnings growth

Firms must boast four successive years of earnings growth Slater looks at both historic and forecast profits in this context before they can be considered. If profit growth exceeds 25% a year, he is wary, as this sort of pace is often unsustainable.

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Jim Slater's strategy: check for outperformance

Slater checks that the firm's earnings are backed by solid cash flow and the shares have recently been performing better than the market, a sign that investors are beginning to appreciate their appeal.

Jim Slater's strategy: monitor directors' dealings

Another element of Slater's strategy is checking on directors' sales; if several are ditching shares, "I start to worry". Let your profits run and ditch your losers at the first sign of trouble, says Slater investors often do the opposite.

Slater's current favourites in the UK include Goals Soccer Centres (GOAL), an operator of five-a-side football sites, and Accuma (ACG), which is cashing in on the debt boom. He is also a long-term commodity bull and is especially keen on uranium. Slater is deputy chairman of Aim-listed Galahad Gold (GLA) with a 10% stake, and holds shares in Toronto-listed SXR Uranium One (SXR).