The difficulties of Jim Slater’s investment strategy

Jim Slater, who was a famous financier in 1970s, died on the 18th of November 2015. He was famous in buying stakes in undervalued firms and also wrote a book called “The Zulu Principle” which explains his investment strategy of “clearly defined and narrow area of knowledge”. However, such an investment strategy has some difficulties. Firstly, defining an “undervalued” company is a difficult job. Small but successful companies are not always undervalued, as stock prices do not only reflect the companies’ current values, but also reflect the public opinions about their future values. Therefore, your prediction has to beat the market, which is very difficult. Moreover, some small, undervalued companies have difficulties to find themselves; therefore, even you believe they can have bright futures, but the market force is actually working against these companies, they have more difficulties than you may imagine. Secondly, when narrowing areas of knowledge, it is easier to ignore existing exogenous risks, just like what Jim Slater died. Jim Slater’s fall was largely caused by the stock market crash following the oil crisis. Thirdly, narrowing areas of investment makes risk management more difficult. Good investment has much higher returns, but meanwhile bad investment has much worse losses as well. Being specialized makes one more efficient, but also creates higher opportunity cost and increases the losses if one fails.