Hal Kellman was born into what some may deem under privileged circumstances but that didn’t stop him from being the first in his family to go to college. Today he’s the Principal at the Kellman Family Office where privately manages investments for a handful of lucky clients. The remarkable thing about it all is that he’s averaged a 20% return over the past few decades for his clients.
Alan-Welcome back! I'm here today with Hal Kellman. The Kellman family office. And Hal, welcome to today's show.
Alan-So Hal, for the listeners, could you give the background of how you got where you are today? Let's start way back at the beginning for you on your life.
Hal-Okay, so the beginning is when I was born. I was born in the South Bronxs and as I found out later in life, I lived 6 blocks away from Colon Powell and we both lived there 1953, 1954, and 1955. But the important thing is when I was born, we only had one bedroom, one bathroom, and there were six of us. I realized I wanted to do something more and different in life and my grandfather had come to this country in steerage in 1911 he worked in the garment industry. My father dropped out of high school in 11th grade, he worked in the garment industry. And they both said son, the Kellman's do not go to college. And I said, I'm going to go to college. And they said, we have no money for you. I said I would do it on my own. That was the beginning when I realized I had to do things on my own. I've always liked entrepreneurs, specifically people who want to do something to change the world. That's my main theme "doing something and doing it on your own".
Alan-It's amazing against all odds, you don't have the history or the support system from those ahead of you, but in that inner drive you were feeling something. Where did you end up pursuing your college education?
Hal-As it turns out, the one thing I didn't have was money. I had a specific goal and it wasn't that hard. It was to have enough money for food, clothing, shelter, and a little fun. When I started out in life I didn't have that. I decided I wanted to do something on my own and not work for a big corporation like my father did. He worked 40 years for a company and they gave him a pension for $10 a month for each year. His pension, besides getting a crappy salary, was only $400 a month and it was fixed and it ended when he died. That was the other end of what happens with corporations and that's the part that I saw. I didn't like big corporations.
Alan-You took a degree in electrical engineering.
Hal-It's interesting, life is interesting. You never know what is going to happen, but you can have long range goals. My big thing is strategy. I feel most comfortable with long term strategy, usually looking at a decade and tactics to get there. My goal was to go to school in New York because it was free. CCNY and then work in the Northeast, go to work for IBM. NYC had a promise for every high school graduate with a B or better grade you can go to CCNY for free. That seemed to be my way out. I had an 87 average. They did it in numbers instead of averages. Four years, I don't have to pay for anything. They lost my application. And my parents wouldn't come down to support me, so I took my 15 cents token and went down to the office. I told them, they said "son, you didn't file it on time, get out of here." I didn't know whether I would ever go to college. Everyone I went to school with graduated in June and I didn't know what I was going to do.
Alan-Fast forwarding now, you ended up after your degree coming out to California?
Hal-What happened was, there was one college in the country, Michigan College of Mining and Technology, that had an August 31st application deadline. I applied to them in July, got a scholarship for undergraduate, then went to University of Michigan for my MBA. Electrical Engineering MBA. I stayed in Ann Arbor for another 10 years. I didn't come to Silicon Valley till 1978.
Alan-What finally drove you to come out here from Michigan?
Hal-There I am in snowy Ann Arbor, and I read the electronic news all the time. Ted Haufla wrote a two-part series about Silicon Valley and Intel had an advertisement about the 4004 family microprocessors. I thought wow, this is going to change the world. And everyone including my wife said I was crazy. That was November 15, 1971. My wife's family was in Detroit and she wanted to stay near them, so I had to wait for their family to leave and go to Florida like most people do from New York or Detroit when they retire. I also had a company. I started a little company in Ann Arbor with $3,000. There were three of us. We took $1,000 each for a software company and we built it up. I worked 14, 15 hours a day for seven days a week for ten years, sold the company for 3M and moved out here. That was the Genesis. My wife's family moved and my company got bought.
Alan-In your first company, it was basically a $3,000 investment. The show is followed by a lot of entrepreneurs and inspiring people, no one knows the full history of your story, yet. I want to go back to the $3,000 net worth investment in there, what was your big break? How did you get this company off the ground?
Hal-Silicon Valley, Hewitt and Packard, they were great people. There I was, the $3,000 came from the three founders, $1,000 each. We needed to get computer equipment. Back then, it was many computers. We had just gone from main frames, the IBM main frames, to 80 different mini computer companies and one of the newer ones was Hewitt Packard. I came out here to get either Hewitt Packard 21/14 and 21/16s or Varian equipment. My first stop in Palo Alto, luckily both were here in Palo Alto, was Varian. The first question the guy from Varian asked me was "Son, how old are you?". I said, 25. The second question, what's your net worth? I said $3,000 for the company. He said get out of here. Luckily the second company I went to was Hewitt Packard down the road. They just took out a purchase order, they said how much equivalent would you like? I thought of the biggest number I could, $100,000 worth of equipment. He wrote that down. He said, how long do you want to pay? I said 60 days because I knew we could program in 27. They gave us $100,000 worth of equipment with 60 days to pay and that's why we were successful. Because of Bill Hewitt and Dave Packard.
Alan-The dreams of Silicon Valley were alive and well back then. Hal, I need to take a quick break and when we get back after these messages, I want to jump into your exit strategy on this first company then where you went from there. We will be right back after these messages.
Alan-Welcome back, I'm visiting here today with Hal Kellman, the Kellman family office. And Hal, before the break, we ended off with your first big win and the company was an order coming in from Silicon Valley, Hewitt Packard, $100,000. You could use that as a scaling point for the company and then, eventually, you sold out. How many years was it till you got to the point where you went over to 3M?
Hal-I was independent working for ISI, Interactive Systems Inc. I built it with two other people from startup $3,000 to 4 million in revenue, $400,000 in earnings. Then we sold the company to 3M because they wanted to get in to factory automation.
Alan-Fast forward, what year was this now?
Hal-This was 1978, and as soon as I sold the company, I moved out here.
Alan-It's interesting, '78, Silicon Valley was still starting. You move out though, were you still with the company or did you take the exit strategies and say I'm going to go do something else now.
Hal-No, I didn't know anyone. I've always been an explorer and people pitted me about that my whole life. When I would tell people about Silicon Valley for the eight years that I lived in Michigan and was going to Silicon Valley for different conferences, they would always call me Marco Polo. As it turns out, I have a private investment in the company and I didn't name it what the cofounder did, Marco Polo learning. It's funny, some things in life are destined. Marco Polo, the explorer, doing different things. I knew no one in Silicon Valley, I came out here and there were regional brokerage firms. The two best were Robertson Stephens and Hambrecht and Quist. I said these are my type of companies. I dealt with them and again, still 1978, in '77, it was the bad seventies. Hambrecht and Quist had only done two IPOs. In '78 they did seven. I bought five of them. I really liked it and said, boy, I found gold. The worst of those 5 deals went up 10 times in value. This is it. This is my type of company!
Alan-You found a knack for really getting in, doing the research and evaluating value in companies.
Hal-Yeah, early. I should have been a venture capitalist, but I didn't have the contacts. Essentially, I've been a public venture capitalist all my life, buying companies that are 5 or 10 million in revenue which you could have done from 1969 when I started to 1999.
Alan-Hal, I understand that you weren't just picking the stocks, but you also started to do some writing as an analyst for some magazines in early Silicon Valley companies. How did you get in to that?
Hal-Again, nothing is easy. There was a new magazine that was started in 1989 called upside magazine and the people who started it were from Stanford. The first person who did what I wanted to do was from Stanford. Luckily, it was so bad that I got a call from the cofounder of upside, Tony Perkins, he said Hal, I saw a couple of your articles that you've written for Detroit Discovery, do you think you could do this for our new magazine? The companies I had written for Detroit Discovery when I was still in Michigan went up an average 70%.
Alan-You must have had a pretty good following by that time!
Hal-The interesting thing is, it was Michigan. All my clients in Michigan were either doctors, dentists, or osteopaths. They drove me crazy. I realized that for me to do my own thing, I had to have my own way of looking at it and I couldn't do what everyone else did. The thing that changed was '73, '74 when everyone went down. I had my first double digit loss. If I was going to continue I was going to do it my way and I changed my approach.
Alan-Hal, I need to take a quick break. I'm visiting here today with Hal Kellman of the Kellman family office. When we get back I want to talk about when you look at companies, how do you assess undervalued, underperforming or companies that are ready to take off. We will be right back after these messages.
Alan-Welcome back. I'm visiting here today with Hal Kellman of the Kellman Family Office. Hal, for the listeners, you have a pretty good reputation for picking good stocks and good investments over the years. How did you come about, do you have some type of system or process to know if you want to be with a company? What do you look at for criteria?
Hal-The two main areas I focus in is what I know because I studied it or was interested in it. Initially because of electrical engineering, I know hardware and software. It used to be IBM and the seven dwarfs. I always look for companies that can become the next big success and if something is already known and followed by 40 analysts, I'm not interested in that. I try to find something, usually because of technology, that is either misunderstood or early or groundbreaking and it's the cutting-edge technology.
Alan-It's basically, you're able to predict those trends and follow through. Has your philosophy stayed the same or has it changed over the years as technology has evolved?
Hal-Basically, it's the same thing, but it's evolved because the world changes. Over the last 25 years, it's been forty percent of what I do is technology, hardware and software, the company's change. Twenty percent is healthcare because I'm interested in that. And the other forty percent is still miscellaneous. I tried to get it down to a system, but it's still a personal type thing where you just can't have a formula. I do have formulas, but that's only one club in my golf bag.
Alan-I want to jump into healthcare a bit. It's a lot in the news because of the Affordable Care Act, revamping, you saw that Thernos has been over there, the blow up of the business model evaluation. There are a lot of companies coming out that have been saying the new solution is wellness, rather than reactive medication, it's preventing things up front. Where do you see the trend really going? Do you see wellness as something alive and well that will disrupt the current system? What are your thoughts on that?
Hal-More generally, my emphasis is on genomics. It wasn't until we cracked the genome and that took 3 billion dollars and more than a decade to just get the first science. It's the same thing with technology. It takes 15-20 years to understand the science, then over the course of time you get the companies. If you were the first person to get your genome tested, it would have costed $3 billion. Then it went down to $100,000. When it broke $10,000, I was one of the first 5,000 people to get my own whole genome tested. It was a company in San Francisco that did that, Illumina, I went down there and they made sure you talked with a doctor for an hour before they did the test because if you had some serious disease, they didn't want you to go off and kill yourself or do something stupid. The good news is, I got tested for 1,200 diseases and I have no extra chance of getting any of the 12. So, I should live to be 89.
Alan-When you look at a person wanting to jump into the investment industry today, what advice would you give them?
Hal-I would tell them, the interesting thing is, it hasn't changed that much in 300 years. People kid about Jack Mob when he talks about Forrest Gump. My hero is Benjamin Franklin. 300 years ago, he was America's first entrepreneur, 1706, he only had two years of formal education, didn't have any money, he essentially ran away from his family. He lived in the number one populated city and went to the number two, Philadelphia to make his own way. He did a whole bunch of entrepreneurial things, and spent the first 42 years of his life making money. Then the last 42 giving it away. He had so many things that he did. I've read different accounts of him and I've had to read several accounts to get the full story, but one of the greatest things was that's the first time I understood the miracle of compound growth, listening to Ben Franklin's story. He willed one thousand pounds to each of his cities, Philadelphia and Boston, with the proviso that none of the money could be spent for 200 years. The first city, they reinterpreted and reopened it up in 100 years. That only made 2 million dollars. The other one, they made it the full 200 years in 1990, it was 5 million. For one thousand pounds to 2 million or 5 million, the miracle of compound growth. That is underestimated. People talk about it, but they don't realize that compound growth for 10, 15, or 20 years any one today could get rich.
Alan-It shows his brilliance, too, and foresight. If you are looking back at courses you enjoyed the most at college, what would that be? Where is your passion for learning?
Hal-As it turns out, my passion, besides electrical engineering and finance, was history. The best courses I took were at the University of Michigan, but it was not in finance. I took two history courses, one was the entrepreneur in history and the other one was an economic history of the United States. They had 24 specialized libraries and I went back to each of the 24 libraries that had different parts of things I was interested in and I realized most of the history books are wrong because they are written after the event and they reconstruct it. What I learned was most of the entrepreneurs are really self-taught and they dropped out at that time of high school and now the drop out of college or graduate school. There's a certain entrepreneur personality that I learned to follow and my biggest successes have been by investing in those type people.
Alan-You know, Hal, when you look at the history books, if you could choose any time to live, when would that be?
Hal-My ideal time would be 1450 to 1525 and living in Florence, Italy with the Medici family because they financed so many great things with the renaissance and they must have had great dinner conversations with Leonardo DaVinci, Rembrandt, and all the great people, Copernicus, around the dinner table.
Alan-Hal, we are out of time today, but I appreciate you being on today's show. I've been visiting here today with Hal Kellman of the Kellman family office. Thanks for being with us. We will be right back after these messages.
Alan-Welcome back. Over the break, I was visiting with Hal Kellman and there was a little app called Marco Polo that you mentioned. I wanted to hold this over the last segment because I think it would be a great interest to the listeners out there. Tell me about this app. It was one of your first software investment?
Hal-This was my first private investment. Essentially there are two million apps in the app store. You think with an app, what chance do you have? This is an early childhood education and the person who developed it is a great entrepreneur. It got picked up by Apple and featured a year ago as the app of the week. We got three million downloads and as we speak now we got 5 million people who have purchased it. It is the number one early childhood education program in the world. We just got what reportedly is the richest man in Hong Kong and the second richest man in Asia. All I know is he's worth more than 30 billion dollars and that's horizon ventures and he just put money in the company. He thinks we can do great things and we are going to do more things besides apps. We are going to have a Marco Polo Academy and we are going to have a half hour programs that are going to be sold to one of the early childhood education channels.
Alan-And this is all in Early Childhood Development? Do they get videos? What do they get with the app?
Hal-It's learning in different areas. There are 400 million kids in the world who don't have access to early childhood education. One of my passions is to give people equal access and have an opportunity, even if you aren't born into the right community or zip code. As it turns out, all over the world, people are buying it because you don't even have to know English. We have it in 8 different languages. Little kids start playing with it and grandparents buy this for their grandchildren. You learn about the ocean, you learn about the weather, recall, and there's a newer app, I forget the name. There are four apps now that are selling. We are going to expand and use the best characters from this into the TV program called the Polos.
Alan-How many languages is this in?
Hal-Last I checked, it was in 8 different languages. It's worldwide.
Alan-To find it, you go to the app store?
Hal-Yeah, Marco Polo Learning.
Alan-Okay, is there an initial trial period? Do you have two phases of trial app?
Hal-It's only $2.99. Plus, I think they have a three pack. If you buy the three you get a little discount.
Alan-It's amazing with technology that what it is doing is driving learning down to earlier ages and making it available where it wasn't before. With this technology and giving kids the opportunity.
Hal-Right, before it was CD-ROMs. When I was writing for upside, I wrote up two learning companies that sold CD-ROMs. You may remember where in the world is Carmen Sandiego and Westwood Wagons. One of the companies was a learning company and the other one was Broderbund, both were born by the guy that's on shark tank, Mr. Wonderful O'Leary, they were a couple hundred million dollars and he bought it and sold it to Mattel for almost 4 billion.
Alan-I used to play that wagon game.
Hal-My kids actually did the pretesting. The learning company was in Fremont, they would give them cola, which my wife didn't like, and pizza and they'd test all those things when they were a small little company in Fremont.
Alan-How fun! Well, Hal, we are out of time, but it has been a real pleasure having you on today's show. Any final words for the listeners?
Hal-Probably if I had to buy one book? I wouldn't buy any of the new books. Philip A. Fisher, he was the originator along with Tyrrell Price of growth stocks. In 1958, he wrote Uncommon Values and Common Stocks. I read that when I was in business school. It's more than 50 years later, the only thing I would change is unit trust to mutual fund. He was a great growth stock investor and told people how to do it.