Worth Magazine, May 1994

Investors Edge, by Peter Lynch

Charlie Silk’s 150-Bagger
My candidate for the world’s greatest amateur investor is Charles Silk. I met this fellow
Bostonian halfway around the world, at a reception at the Bible Lands Museum in Jerusalem
in 1992. We were part of a trade mission to Israel sponsored by the state Massachusetts.
It turned out we had a few friends and many stocks in common. On a bus ride to historic
sites, we had our first extended chat. Not about historic sites, but about Blockbuster
Entertainment, Charlie’s most successful pick.

Charlie bought Blockbuster many splits ago, in 1984, for $3 a share. It wasn’t called
Blockbuster yet. It was called Cook Data Services, which fit into Charlie’s area of
expertise. He had had his own data-processing company, which had fallen on hard times,
and he was forced to shut it down. He was sitting home, doing telemarketing for a
software outfit and wishing he could find another way to make a living.

Cook Data Services solved his problem. The shares he bought for $3 apiece are worth $450
today, so his $10,000 investment became a living in itself. Thanks to this one exciting
stock, he was able to abandon telemarketing and devote himself to his favorite hobby –
looking for more exciting stocks. He and two of his three sons are now full-time stock
pickers. I’ve often said that couple five-baggers every decade is enough to make do-it-
yourself investing a worthwhile pastime. With a 150-bagger like Cook Data, one every half
century or so is all anybody needs.
Call Charlie a lucky man for stumbling on Cook Data Services, but luck didn’t make him a
millionaire. The hard part was holding on to the stock long enough to get the full
benefit. After the price had doubled and then tripled, he didn’t say to himself, I’ll
take my profits and run, like many investors who invent arbitrary rules for when to sell.
He wasn’t scared out when the price dropped, as it did several times, and he ignored the
highly publicized negative comments made by forecasters and “experts” who knew less about
Blockbuster than he did. He had the discipline to hold on as long as the fundamentals of
the company were favorable. It was not a guess on his part. He was doing his homework all
along.

In my investing career, the best gains usually have come in the third or fourth year, not
in the third or fourth week or the third or fourth month. It took eight years for Charlie
to get his 150-bagger, but in a way, he’d been preparing for opportunity since college.

At the University of Michigan, where he earned a degree in accounting and finance,

Charlie was first exposed to one of life’s great mysteries: How do you find a good stock?
A professor named Wilford J Eiteman, famous at the time for market theories, posed the
question. Over the year, Charlie found his own answer. He searches for good stocks among
small companies that are relatively debt free and have been beaten down in the market to
the point that they’re selling for less than the cash in their bank accounts. “I’m paying
nothing for the company itself,” Charlie says in his rich Boston accent. “The only thing
I’m risking is my patience.” He reminds us that on the New York Stock Exchange, 70
percent of the companies are followed by two or more analysts, but on NASDAQ, 72 percent
are not covered by any analysts, This lack of coverage helps produce the great
distortions between price and value that he seeks out.

Beginning in the 1960s, Charlie combed the so-called pick sheets in the over-the-counter
market. Many small companies went public in the hot initial-public-offering market late
in the decade only to see their prices collapse in the 1973-74 bear market. But it was a
heyday for Charlie. Roaming through the wreckage, he found several low-risk opportunities
in the area he understood: computers and data processing. A company called Computer Usage
has $4.10 a share in cash: he bought the stock for $2.25. Another was Scientific
Computers, which $1.37 a share in cash and at one point was selling for 25 cents. On the
rebound, it hit high of $33.50 had bailed out at about $6. “I learned then how tricky it
is to know when to sell,” he says.

Now we move forward to 1984. Another hot IPO market was followed by a collapse at the end
of that year. Small high-tech stocks suffered the most. For Charlie, it was 1974 all over
again, except this time he didn’t have to bother with pick sheets. NASDAQ had launched
its computerized trading system.

He surveyed this latest wreckage. Cook Data Services caught his eye. It sold software
programs to oil and gas companies – right up Charlie’s alley. It came public in 1983 at
$16 a share and quickly rose to $21.50, but the price had fallen to $8 when Charlie began
tracking it. He was still tracking when year-end selling dropped the price to $3.

This was the kind of risk Charlie liked to take: a company with no debt and $4 a share in
cash, selling for $3. But cash in itself is no guarantee of success. If a company is sick
to begin with, it has to spend its cash to stay alive. Cook Data was quite healthy. Its
revenues had increased four years in a row. “To produce a record like that,” Charlie
says, “they had to have something on the ball.” His $10,000 investment was as much as he
could scrape up. It made him one of the largest shareholders.

A few months after Charlie bought his shares, Cook Data announced it was moving away from
data service and into the “consumer area.” The company’s president, David Cook, had an
ex-wife who was movie buff apparently; she still had some influence and convinced him to
open a video superstore in Dallas.

Charlie wanted to know more. He got some of his best information by calling the company
directly. He made contact with CEO, Ken Anderson, and also with the investor-relations
person, Barbara Phelps. She agreed to send him articles about Cook Data that appeared in
the Dallas newspapers.

One of the most interesting things the company sent Charlie was an independent study on
the future of the video-rental industry. “When I read that thing,” Charlie says, “I found
out that 30 percent of American households owned VCRs, and that eventually 60-70 percent
would own these machines. [This estimate turned out to be conservative.] All these
millions of people with VCRs were going to need an endless supply of tapes.”

It got more interesting when he went to library and looked up company filings in the
SEC’s Official Summary of Security Transactions and Holding. He saw that two different
groups, the Sanchezes from Texas and Scott and Lawrence Beck from Illinois, had become
major shareholders. Scott Beck was coauthor of the video study and obviously impressed by
own research. Charlie also learned that revenues from Dallas superstore had more than
doubled in the first three months of operation. His sources at the company confirmed
these numbers and told him how crowded the store was. It was, they said. People were
driving from as far as 30 miles away.

Meanwhile, the stock price had begun to rise on heavy volume. Volume is something Charlie
watches very closely. In his experience, stocks on the way down usually don’t hit bottom
until the volume has subsided. Heavy volume in the upward direction is often harbinger of
more big moves. In six months from 1984 to early 1985, he’d already made five times his
money. Some of his friends were urging him to be sensible and to take his wonderful
profit. This is where many investors would have tripped up, but having missed some
spectacular gains in the 1970s, Charlie kept his focus where it belonged – not on the
stock price but on the company itse
In spring of 1986 Blockbuster opened an outlet in West Roxbury, a mile from Charlie’s
house. Suddenly, everything he had been hearing about came to life, and he could see the
crowds for himself. It is a tremendous advantage for investors to have stores owned by
immature public companies open in their neighborhoods. They get an early whiff of success
or failure before Wall Street picks up the trail. Perhaps if there had been a Blockbuster
in my own suburb of Boston, I would have noticed what Charlie noticed. “My sons and I
would go over there on Saturday night and count cars,” he said. “The parking lot was
always packed. I thought to myself, ‘This is going to be incredible.’”

By late summer 1986, three new superstores had opened in Texas, and the Becks had bought
franchise rights to four new cities. Revenues continued to grow at a rapid pace. A
secondary stocks offering was planned for September to raise money for more expansion.
The company was changing its name from Cook Data to Blockbuster Entertainment.

A week or so before the offering, Charlie was reading Alan Abelson’s column in Barron’s
when he came to pan Blockbuster. Ableson’s argument: Who needs another video store?

Abelson’s comment produced a spate of selling that caused the stock price to drop 15
percent. Charlie was a fan Abelson’s, but he was confident he knew more about
Blockbuster. The sales figures from Blockbuster showed that people were flocking to the
new superstores. But enough investors backed away from the offering that instead of the
anticipated $20 million, Blockbuster could raise only $3.7 million.

Wayne Huizenga, the Waste Management tycoon, entered the picture in late 1987. A partner
with Scott Beck’s father, Huizenga jumped on the Blockbuster opportunity, eventually
taking complete control. “Now I was really impressed,” Charlie says. “I was aware of the
terrific job Huizenga had at Waste Management. I also liked the fact he wanted to
concentrate on company-owned stores, more profitable than a franchise operation.”

Toward the middle of 1987, Charlie started worrying about the stock market in general and
the fact that he had too much money riding on one issue. So he sold a portion of his
shares in the high 30s, just before the big correction in October of that year. Short
term, this proved to be a smart move, because Blockbuster stock promptly fell by half, to
$16. But longer term, he would have been better off to hold on to every share to get all
of Blockbuster’s tenfold gain over the four years. In 1989, another Wall Street expert
spooked the shareholder. Lee Seidler, an analyst for Bear, Stearns, made a big fuss over
the company’s practice of carrying a large quantity of older and less-popular video tapes
on the books as assets, when in his opinion they were worthless. This, he argues, made
the company appear more profitable than it was.

Seidler’s also was taken so seriously that the stock price got clobbered (falling 36
percent). The accounting flap was still an issue six months later when Huizenga visited
Fidelity in December 1989. I was running Fidelity’s Magellan fund at the time was
impressed with his explanation. He said that even if the company changed accounting
methods, the result would be a one-time earnings drop 10 to 15 cents. That was peanuts
compared to the tremendous growth of the company.

Having done his own research, Charlie didn’t need to meet Huizenga to reach the same
conclusion. He and his sons had traveled to New York, Connecticut, and elsewhere to visit
other Blockbuster stores. Everywhere the stores were jammed with customers.

Today, Charlie still owns a big chunk of Blockbuster. The recent merger with Viacom,
which in turn has swallowed up Paramount, has complicated the story considerably. He’s
studying the situation.

For all the benefit he’s gotten from this one company, following its progress has taken
him only a few hours a month. These days, Charles works at his investing full-time,
though his method is basically simple. Every morning, he scans the NASDAQ section of the
business pages, looking for stocks that have fallen to new lows. From the Moody’s OTC
Industrial Manual and other sources, he finds out which of these beaten-down companies
are cash rich with no debt and have a potential for a turnaround.
He is excited by the hundreds of new small companies launched at high prices in the hot
IPO market of the past three years. Already, some of these 1,400 or so companies have
fallen out of favor. Whenever we get the next sharp correction, Charlie will be ready to
pick up the valuable pieces.

Peter Lynch writes the Investor’s Edge column for each issue for Worth. From 1977 through
1990 he managed the Magellan fund, the best performing of all mutual funds over a 15-year
period, and he is a vice-chairman of Fidelity Management and Research. His latest book,
Beating the Street, is published by Simon & Shuster.