Market strategist and stock investing guru Jordan Kimmel answers 10 (or 12) questions about his investing life.
Jordan Kimmel has more than 30 years in the financial services industry as both a retail broker and as a fund and portfolio manager. He wrote “The Magnet Method of Investing” (John Wiley & Sons, 2009). Most recently, Kimmel has co-created the FACTS model, which measures the “integrity” of a public company based on strong leadership, core values and ethical cultures. AAII members are familiar with Kimmel’s Magnet Stock Selection Process, which blends elements of value, growth and momentum to choose promising stocks; four versions of the Magnet approach are tracked in the AAII Stock Screens.
For this interview, we include a question suggested by our previous interviewee, AAII president John Bajkowski: “What leisure book, if any, are you currently reading?” Read on to see his fascinating answer.
Jackie: What are your favorite financial applications? Phone apps, websites or software.
Jordan: The two websites I like a lot, both in conjunction with separate charting tools, are MarketSmith, which is Investor’s Business Daily’s (IBD) online service, and VectorVest. They are two services that I’ve definitely been using. The online IBD obviously has only gone online a couple years ago, but VectorVest is something I’ve been using for maybe 10 years already.
Jackie: How do those tools work? I’m familiar with the names of course, but could you just briefly explain what they offer?
Jordan: MarketSmith has a really nice screening function. They have hypothetical screens for people like Warren Buffett and Peter Lynch and so on.
But I’ve also added my own Magnet Simple and Magnet Complex screens. So intraday I’ll just jump on their site and, say, I’ll hit Magnet Elite. I can see that today six items showed up on Magnet Elite, and on Magnet Simple 30 companies showed up. They are the exact screens that I have previously set up, so I know all those companies meet my own criteria already.
I probably have seven or eight different screens set up on there. That’s the tool that I like the most, and then there’s also just tons of financial information on each company once you decide you want to look at a company further.
Jackie: Tell me a little bit about what you look for in stocks. How do you pick the stocks? What are some of the characteristics you look for?
Jordan: Well I have two different models, both the Magnet model that I’ve used for years and then this new model called FACTS, which looks for the most trustworthy companies. FACTS brings Magnet criteria and combines them with extra financials. The extra financials, things like corporate governance, are not on any other screening tools I’ve found so far.
On the Magnet Simple and the Magnet Complex, what I believe in is a combination of value, growth and momentum. So what I’ve done is built out things like minimum amount of revenue growth, maximum amount of price to sales and trading volume screens. There are about 16 different criteria that I’ve added on, and these filters do a great job of going right through the whole database and selecting only those companies that already meet my own personal criteria.
Jackie: What was the first investment you ever made?
Jordan: It’s kind of a fun story, and I highlight it in my first book, “Magnet Investing” (Next Decade, 2000). When I was only eight years old, my family used to discuss the stock market around the dinner table. I think being that I was having a hamburger way too often, I held up the bottle of Heinz ketchup and said, “Is this is a public company? Can you invest in Heinz?”
And so at eight years old I took my accumulated allowance, birthday gifts and everything else and rolled it all and made an investment in Heinz, where it actually stayed invested right up to the last couple years.
I’ve had that investment for 50 years. I like to tease people that I was 50 years ahead of Warren Buffett in buying into Heinz. It was a cool first foray into investing and I learned a lot from it, too. Just to share, I don’t know why, maybe I wrote a letter to the company, but I received a box from Heinz with sample ketchup and a couple other products back then. Even to today I have that box, and I store some old memorabilia in there. So I have that box as a memento and a lot of experience as a result as well. It’s a really fun first investment.
Jackie: What about your worst investment?
Jordan: It’s an interesting question. The lesson learned is that the worst investment I think I’ve ever made was one of my best investments that went bad on me. What I wasn’t good at years ago was learning how to sell. I bought into a micro-cap company—in fact, I became the largest shareholder (outside of management) of a company that basically made almost all the poker chips in the world.
It ended up that I made over 10 times on my original investment, but became convinced that the company was going to be acquired. I sold other investments to continue to pile into this one investment that kept going up. Eventually, I learned a lesson on how much diversification and liquidity is proper. The ironic thing is that I learned one of the biggest lessons from something that up until then was my best investment, and then it cost me a lot on the way out.
I think the most important part in sharing this story is that you have to learn how to sell. You have to remain unemotional and remember that a stock is only a stock, and you have to remember how to sell on the way up or at least have a margin of safety. To be clear, the reason I got knocked out so hard is that I ended up using margin to buy even more while it was going up. So maybe it was a little bit of greed. Maybe it was a little bit of overconfidence. It was a lesson that is learned the hard way but helps me to become a better investor today.
Jackie: What’s been your approach to selling? I know sometimes it can change with different types of investments, but do you target a maximum percentage decline? Do you look at the fundamentals to determine when to sell? What are some of the things that you look at?
Jordan: There is selling something that goes bad, which is kind of easy for me. If the fundamentals change or if the company begins to trade on very heavy volume to the down side and breaks point and figure support, I simply sell. I do believe that ultimately almost all companies die and that you only want to be involved in them when they’re healthy. The easy part for me was always selling stocks that are showing me losses, and I’ve always believed in controlling losses and keeping losses short.
The trouble was I had had a couple of such spectacular winners early in my career that I didn’t learn how to sell on the way up. It might sound extreme because people aren’t used to stocks doing this well, but what I do now is that when a stock goes up by 40%, I sell 20% of my investment. When that same company goes up another 40%, I sell another 20% of the stock. At that point, almost my entire initial investment has already been returned to me and I’m now playing with house money.
What I believe in is the outliers, the companies that make you the extraordinary amount of money. The only caveat or lesson learned is that regardless of how great the company is, you should sell a little bit of stock when you’re up 40% and up the next 40%. I’ve also sworn off margin, or the greed that comes in when the stock’s doing so well that you want to own even more and then own some on margin. That’s one of the hardest lessons to learn of all, but it’s a lesson you never forget.
And just to add to that, people often freeze on both a buy and a sell. Often it’s a really good idea to buy a third or to sell a third of the position you have. People get frozen: They’re thinking about buying, and then they think it’s too late to buy. Then the stock just keeps going and going and going, and they wish they had bought. The way to avoid that is just to buy a third of what you’d like to have in full and at least get your toes wet, because that way you don’t miss the occasional stock that can really make a difference for you.
Jackie: If I gave you a million dollars right now, how would you spend it?
Jordan: That’s easy for me because I’m managing three different models, and in each account we have about 30 stocks. We have our Magnet model, we have our FACTS model, which looks for the “most trustworthy, highest integrity” companies, and then we have a dividend growth and income model as well. I would literally put a third, a third, a third into each one of those three strategies, and that would provide enough diversification, enough growth, and enough income. I do eat my own cooking, and we spend a tremendous amount of time creating these portfolios. I would go a third, a third, a third, and I would feel very comfortable in doing that.
Jackie: What’s the best advice that you could give someone if they’re just starting out in investing?
Jordan: The best advice I would give is to get started, to actually get started, and to recognize that paper trading literally means nothing. The only way to learn about yourself and the market is to have a live portfolio with live money, seeing stocks go up, seeing stocks go down, feeling them, and learning to control your emotions. Obviously, you want to start small, but you want to get started. Anybody who is running a paper model is not learning as much as they think they are. The only way you could learn is by opening and closing transactions and learning who you are as an investor.
Jackie: I think identifying what you’re looking to do as an investor is a big part of it. You need to identify the type of stocks or securities you’re looking for, and then you can go from there.
Jordan: To add on that, Jackie, I have found that I am not a very good deep value investor. I buy a stock, and within a month or two, which is for a value investor basically no time at all, I get bored and want to move on and see something that’s moving. What I learned is that I need a combination of momentum with companies at a good value that are growing rapidly. Only by owning companies and opening transactions can you really learn how much patience you have, how much threshold for volatility you have. The only way that happens is by actual trading, not by keeping a mock portfolio and thinking you’re learning anything.
Jackie: What makes you mad?
Jordan: From my own experience, what makes me the maddest is that I’ve already shared that I’m not good about holding stocks that go down. I’m very good in fact at taking small losses and accepting them. What makes me mad is not keeping track of those investments and acknowledging when they either just stop going down or turn around and get healthy. Oftentimes I’ll see a stock two, three, four years after I sold it hitting brand-new fresh highs, and I just didn’t have the mechanisms in place to track those companies.
If a company is good enough to make my initial portfolio, I’ve learned to put them in a watch list for the future so that when they do turn around, I can take full advantage. Some of my best investments have come from stocks that had gone considerably lower from where I sold them, kind of gone quiet for a couple of years, and then all of a sudden have a volume surge out of the bottom. Often those turn into significant winners over time. So what’s made me mad in the past is just losing track of my old best ideas only to see them way, way higher than where I had originally sold them. I feel stupid.
Jackie: That happens in our Dividend Investing portfolio. There have been several stocks that we removed because of valuation or because of other metrics. In particular, when the dividend yield gets too low compared to its historical average range, we’ll delete it. But then when the dividend yield becomes more attractive again, we may add it back to the DI portfolio. Of course, this depends on whether the financial stability and additional metrics we seek are still applicable—I think that’s an important aspect.
Jordan: Right. That’s a great lesson. I think we all have enough computer space. Remind yourself to create a file for stocks not still in your portfolio because even if you sold them at a lower level, your ego has to allow you to buy them back when they’re healthy. It’s a really good feeling to buy a stock that you lost money on in the past and then make two, three or four times what you lost by being disciplined and catching it on the turnaround.
Jackie: This question comes from our last interviewee, John Bajkowski, president of AAII. “What leisure book, if any, are you currently reading?”
Jordan: I like to read outside of business. It just keeps you a little busy. I actually have a couple favorite authors. The one I’d share here is Ben Mezrich. If you don’t know him, he’s the guy who wrote “Bringing Down the House,” the story of the MIT guys that was made into a movie. He has about 10 different books, most of them based on true stories with often very young individuals who did really big things.
I just recently finished reading Mezrich’s “Ugly Americans.” It’s a true story about some Ivy League cowboys who went to Asia in the 1980’s. I don’t want to spoil the story for you. And then I also recently read two other books by Mezrich. One of them was “Rigged,” about some young guys who go to Dubai. It’s a fantastic story. And then there’s one that took place in Russia. Ben Mezrich is just a super, super writer, and I probably have now read seven of his books.
Jackie: Okay, now your turn. What will you ask the next interviewee?
Jordan: My whole career was built by interviewing and reaching out to the best investors. I would always ask them two particular questions: Number one, what makes your personal investment style unique and different? What are the two things maybe that separate you or the way you think from everybody else? And then, number two, what are the last two books that you’ve read—or, I should say, the two books you most recommend that people read about investing?
I think that the best thing you could possibly do is to learn from those who came before you who had the best results. I always like to remind people that if you ask people to lunch and dinner and offer to pay, you’d be surprised who comes. The only way to become an exceptional investor is through a combination of personal experience, learning from your trades, learning what went right, learning what went wrong, and then seeking out older investors with more experience to see if there’s anything you could learn through them as well.
Jackie: Thank you very much Jordan.