money

While Jim Slater's financial publications are first class, I remain less convinced about the merits of his particular technique for finding growth stocks

What is one to make of the Jim Slater phenomenon? It is more than 20 years since the one-time Leyland executive crashed out of the City as a self-confessed "minus millionaire", his go-go financial conglomerate Slater Walker brought to its knees by the great bear market of the mid- 1970s.

There followed several years of relative obscurity, during which Mr Slater wrote children's books, dabbled in shares and other business ventures, and worked on his bridge game. But now, at an age when most men are happy to be pottering around the garden, he is back on the road as an investment pundit, writing, lecturing and columnising about the stock market and his favoured methods of picking shares.

The week before last, he was the star turn at the launch in London of a new unit trust, the Johnson Fry Slater Growth Fund. His 27-year-old son Mark is the investment adviser to the fund. Its objective is to pick stocks on the basis, in the main, of a technique devised by his father. The method, which revolves around finding growth stocks with relatively low price/earnings ratios, is one that Mr Slater has popularised in his recent investment books.

There is no doubt that the Slater name is again showing real pulling power, particularly among private investors. Given Slater Walker's colourful history, albeit a long time ago, it is not surprising that some soothsayers are muttering.

The "real question", declared the Financial Times last week, is "whether the promotion of such a personality-based trust signals some sort of bull market excess". Of course it may do. We are well into the second decade of one of the longest and most enduring bull markets of this century. One day it will come to an end, and when it does there will be no shortage of "told you so's".

But I don't think we need to take quite such a sniffy approach to Jim Slater's return to investment guru status. The man himself, on the handful of occasions I have talked to him, has lost none of his charm, and has had plenty of time to reflect on past events.

His books are, in my view, outstandingly good - highly accessible and full of sound, practical advice. The Zulu Principle is probably the pick of the bunch. As an introduction to the principles of investment for the average investor, it admirably fills a gap in the market. Nobody who reads it need fear losing their shirt.

Just as good, though much more expensive, is the monthly statistical publication, Really Essential Financial Statistics, or Refs for short, which Mr Slater has devised in conjunction with the City publishers, Hemington Scott. This provides a wealth of price and analytical data on each of the 1,800 or so quoted companies in the UK, together with rankings based on different investment criteria - return on capital, relative strength, p/e ratios, dividend yield and so on. It includes summaries of recent directors' dealings in their company's shares and of stockbrokers' earnings forecasts.

Given its size (three volumes, 2,000 pages a month), expense (pounds 675 a year for a monthly subscription, pounds 275 for a quarterly one) and sophistication, Refs is only really going to be of practical use to those with relatively large portfolios who make their own investment decisions and have an above- average grasp of investment terms and principles.

But for anyone who does do his or her own investing today, and enjoys the process of studying the markets, or for the growing number of investment clubs now sprouting up around the place, Refs is a potential goldmine, a kind of Wisden for stock market enthusiasts.

While Mr Slater's financial publications are first class, I remain less convinced about the merits of his particular technique for finding growth stocks. The basic technique is simplicity itself. You look for shares where the ratio between the company's prospective price/earnings ratio and its forecast earnings growth (by brokers' analysts) is low. Essentially, he is looking for companies where you can buy expected growth relatively cheaply.

This method would have given you a good number of winners in the last couple of years. But they will have mostly been smaller growth companies. Few Footsie companies pass the Slater criteria (though one which did a year ago was Forte, since taken over by Granada). The risks of buying such companies are higher than average. Some will burn out quickly, and liquidity - how easy it is to buy and sell the shares - may be poor. In addition, analysts' earnings forecasts are a shaky foundation on which to build any investment choice.

My view is that Mr Slater's method is one which all but the most experienced investor should approach with caution. You have to be nimble and know what you are doing to hope to profit from it consistently.

Since he first pioneered his method, he has suggested it can be refined into a more sophisticated technique by adding other filters which reduce the risk - for example, the requirement that a company's cash flow also exceeds its earnings; and that the shares have shown positive "relative strength" (outperformed the market as a whole) in the previous month and year.

Back-testing a portfolio selected on this basis a year ago shows it would have outperformed the market comfortably (20 per cent against 9 per cent). But I remain prejudiced against it, partly because it is not my own favoured style of investing, and partly because I dislike rule-based investment methods.