September 12, 2012

Case Study: The worlds greatest amateur investor according to Peter Lynch

Little is known these days that the famous investor Peter Lynch used to write columns labeled Investors Edge in the Worth Magazine. Most of these columns are not available online, so if you have them somewhere at home, please make them available to the rest of the world. One of the columns is however available online. The topic of that column is "Charlie Silk's 150-Bagger". In the column, Peter Lynch tells the story about Charlie Silk who was using the same methodologies as being used by Peter Lynch to find great stocks.

Charlie Silk used to run his own data-processing company, and since he had experience from that industry, he bought shares in the company Cook Data Services. The company sold software programs to oil and gas companies, didn't have any debt, had $4 per share in cash, and the stock itself was selling for $3. Charlie Silk bought as much as he could, and it proved to be a profitable decision. A couple of months later, Cook Data Services changed its name to Blockbuster Entertainment, and began renting video tapes to consumers. This was in the 1984 and only 30 percent of the US households owned VCR's to play the video tapes.

Charlie Silk talked directly with the management of Blockbuster, and one of the things he learned was that the revenues from the first Blockbuster store had doubled in the first 3 months after the opening. The customers could drive as far as 30 miles (48 kilometers) just to rent videotapes.

The Blockbuster stock increased 5 times between 1984 and 1985, but Charlie Silk didn't sell. He did not focus on the price of the stock, but on the company itself. Charlie Silk found the company before Peter Lynch himself had a chance to invest in it. The reason was that a Blockbuster store had opened in the same neighborhood as where Charlie Silk lived. Peter Lynch lived in a neighborhood without any Blockbuster video stores, so he didn't know about the company. Charlie Silk visited the stores himself, and he said:
"My sons and I would go over there on Saturday night and count cars. The parking lot was always packed."
Charlie Silk didn't sell when the analysts talked about that the US didn't need any more video stores, he had  seen the many customers in the store. Hard facts are often worth more compared with predictions from analysts.

The only mistake Charlie Silk made was to sell some stocks before the Black Monday crash of 1987. He didn't lose as much money has he could have short-term, but if he had kept his amount of stocks in Blockbuster Entertainment, he would have made 4 times his money. In the end, the Blockbuster stock had increased 150 times.

Source: Worth Magazine, May 1994 

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