Brian Belski Says "The Bull Market Continues"

Key Concepts

Rare Earth Metals: Essential components for modern technology and defense, with China currently dominating production and refining.
VANC REMX ETF: An investment vehicle providing exposure to the rare earth and strategic metals sector.
Humalis Investment Strategies (HIS): Brian Bellski's newly launched firm, emphasizing "Investing with Conviction and Humility."
Humility in Investing: Derived from the Latin word "humilis," signifying the importance of acknowledging limitations and not being overly confident.
Conviction in Investing: The firm's tagline, highlighting a strong belief in their investment approach.
Micah 6:8: A biblical scripture ("act justly, love mercy, and walk humbly") that grounds Brian Bellski's approach to public speaking and investing.
Wall Street Week: A historic financial television program hosted by Louis Rukeyser, where Brian Bellski made his early television debut.
Market of Stocks vs. Index Focus: The belief that successful investing lies in understanding individual companies rather than solely focusing on broad market indices.
Portfolio Strategy: The core focus of Humalis Investment Strategies, emphasizing managing equities in both US and Canadian markets.
Separately Managed Accounts (SMAs): A key service offered by Humalis, allowing for customized portfolio management.
Large-Cap Portfolio: Typically comprises around 50 companies, with positions ranging from 1% to 6%.
Small-Mid Cap (SMID) Portfolio: A favored strategy, comprising 65-75 companies, allowing for greater diversification and focus on individual stories.
Value Investing: Focusing on companies with intrinsic fundamental value.
Dividend Growth Investing: Prioritizing companies that consistently increase their dividends over time, rather than focusing solely on current yield.
Market Broadening: The expectation that market performance will spread beyond a few dominant stocks to a wider range of sectors and company sizes.
Equal-Weight Indices: Measures like the equal-weight S&P, NASDAQ, and Russell, which are performing strongly, indicating a broadening market.
Dispersion in Mag 7: The observation that individual stocks within the "Magnificent Seven" group can experience significant performance swings, making them unpredictable.
Underweighting Mag 7: Humalis's strategy of reducing exposure to some of the largest tech stocks due to their volatility and unpredictability.
Overweighting Other Areas: Simultaneously increasing exposure to companies outside the Mag 7 that demonstrate strong fundamentals and growth potential, such as Oracle and Broadcom.
Scarcity Proposal: Humalis's aim to offer unique equity portfolios that adapt to market dynamics and leverage their extensive experience.
AI Bubble Concerns: Discussion around the sustainability of current valuations in AI-related stocks, with comparisons to the dot-com bubble.
Profit Margins and Valuations: The argument that high profit margins can justify higher P/E ratios, but the sustainability of these margins is crucial.
Overcapacity: The risk of investing in assets with abundant supply, contrasting with the preference for scarce assets.
Circular Financing: Concerns about the structure of deals in the AI sector, where revenue generation is tied to ongoing commitments from other entities.
Secular Bull Market: The belief that a long-term bull market, potentially lasting 25 years, began in 2009, with approximately 10 years remaining.
Recessions and Bear Markets: The expectation that despite a secular bull market, periods of recession and bear markets will still occur.
Counterweight Strategies: The potential for dividend growth, value, and SMID strategies to act as a hedge against the unwinding of an AI bull market.
Financials Sector: A favored sector, particularly for value investors, with a bifurcated market expected where large and small banks will thrive, while mid-sized banks may face consolidation.
Return of Capital: The distinction between returning capital to shareholders through dividends versus buybacks.
Contrarian Signal: A decrease in the number of value and dividend growth managers, potentially indicating an opportunity for these strategies.
S&P 500 Price Targets: The role and relevance of setting specific price targets for market indices.
Portfolio Advisory Delivery: Humalis's business model, focusing solely on providing portfolio advice and management, not competing for assets.
Relationship-Based Business: The emphasis on building strong relationships with advisors and clients, including in-person meetings.

Rare Earth Metals and Supply Chain Security

The episode begins with a sponsorship message from VANC, highlighting the critical role of rare earth metals in modern technology and defense. VANC recognized the importance of this sector early on, launching the rare earth and strategic metals ETF (REMX) 15 years ago. The transcript notes that China currently dominates the production and refining of rare earths, posing challenges to global supply chain security. This has prompted countries worldwide to develop their own supply chains and reduce reliance on China. Investment in the rare earth ecosystem, from mining to manufacturing, is growing rapidly, and investors can gain exposure through REMX.

Launch of Humalis Investment Strategies

The main segment of the episode features Brian Bellski announcing the launch of his new firm, Humalis Investment Strategies. The acronym for the firm is HIS, which Bellski connects to the idea that "it's all his anyway." He explains that "humilis" is Latin for "humble," and the firm's tagline is "Investing with Conviction and Humility." This reflects his belief that while conviction is necessary for investment decisions, humility is essential because no one can be right all the time.

Bellski shares the origin of this philosophy, tracing it back to his first appearance on Louis Rukeyser's "Wall Street Week" in December 2000. Feeling nervous before his debut, he found grounding in the scripture Micah 6:8, which he still recites before every public speaking engagement. This scripture emphasizes the importance of acting justly, loving mercy, and walking humbly.

Transition from Institutional to Independent Firm

Bellski discusses his career progression, having worked at esteemed institutions like Beimo, Oppenheimer, and Merrill Lynch. He emphasizes that the investment business is fundamentally about relationships, and he aims to leverage the strong connections he has built. He explains that managing institutional strategy for both Canada and the US, along with portfolios, became demanding. Therefore, the decision was made to focus on portfolio strategy and the separately managed account (SMA) business, managing equities in both US and Canadian markets.

Investment Philosophy and Portfolio Construction

Humalis Investment Strategies will focus on active strategies in the stock market, allowing Bellski to concentrate on what he loves without the broader priorities of a large corporation. He reiterates his long-held belief that "the stock market is a market of stocks," contrasting this with an overemphasis on index calls. The firm's approach is to "run portfolios" and "talk stocks," telling stories about companies and their relevance to people's lives.

Bellski outlines his investment rules, including "Rule number three: I don't know everything." He believes in having deep knowledge of the companies they own rather than trying to be an expert on all 450 companies not in their portfolio.

US-Focused Portfolio: Will typically consist of 50 companies, with position sizes ranging from 1% to 6%. The strategy will focus on sectors, industries, and themes from a fundamental perspective.
Small-Mid Cap (SMID) Portfolio: This is Bellski's "favorite child" due to the ability to play themes, stocks, and stories. It will comprise 65 to 75 companies, reflecting a higher diversification due to the increased risk spectrum in this category.

He provides examples like Google and Apple for large-cap portfolios and Celsius and Shake Shack for SMID portfolios, illustrating how conviction leads to larger positions in favored companies within their respective frameworks.

Differentiation and Market Outlook

Bellski believes Humalis is differentiated by its holistic approach to equities, encompassing SMID, value, and dividend growth strategies. He notes that many investors underown SMID companies. He emphasizes a focus on intrinsic fundamental value stocks and dividend growth based on a proven track record of increasing dividends, not just high yields.

He anticipates a broadening of market performance, moving beyond the dominance of a few large-cap tech stocks. This broadening is expected to benefit dividend growth, value, and small-mid cap philosophies. He points to data showing that equal-weight S&P, NASDAQ, and Russell indices are trading near all-time highs, while a significant portion of individual stocks are down considerably from their 52-week highs. This underscores the need for good stock picking.

Discussion on AI and Market Bubbles

The conversation delves into the current market environment, particularly the AI boom. Bellski argues that the current situation is not comparable to the dot-com bubble of 1999-2000. While valuations might be high, he highlights that profit margins are also at all-time highs. He references Duality Research's analysis, which suggests that adjusted for profit margins, the forward P/E ratio is not excessively high.

However, the sustainability of these profit margins is a key question. Bellski emphasizes the importance of looking at valuation, earnings growth, and operating performance holistically, rather than focusing on just one metric.

He defines a "real bubble" as a situation where there is no roadmap for future cash flows to justify current prices, leading to a significant and prolonged correction. He contrasts this with the current market, where he believes there are justifications for current prices, even if stocks are expensive. He uses Lucent and Worldcom as examples of past bubbles characterized by a lack of underlying value and unsustainable business models.

Concerns about circular financing in the AI sector are raised, where companies like OpenAI and Anthropic have significant financial commitments that fuel speculation. While acknowledging that some private market valuations might be speculative, Bellski differentiates this from the public market's current situation, arguing that major tech companies like Microsoft and Google have strong fundamentals.

Humalis's Strategy and Future Outlook

Bellski expresses his belief that a 25-year secular bull market started in 2009, with approximately 10 years remaining. He anticipates that there will still be recessions and bear markets within this broader trend. He sees Humalis's strategies (dividend growth, value, and SMID) as a partial defense against the potential unwind of the AI bull market, offering a home for capital that might move out of mega-cap tech.

He highlights the strength of the S&P 600 and mid-cap indices, noting that many companies within these segments have substantial cash reserves and pay dividends. He mentions specific examples like Celsius, Shake Shack, Chewy, Glacier Bank Corp, and First Citizens as companies with strong fundamentals independent of the AI narrative.

The financials sector is also a key area of focus, with a belief that both large and small banks will perform well, while mid-sized regional banks may face consolidation due to competitive pressures.

Year-End Price Targets and Business Launch

Bellski discusses the role of year-end price targets, considering them more of an academic exercise than a practical tool for investors. He shares that Humalis's bull case for 2025 was 7,000 for the S&P 500, a target they had set a year prior. He emphasizes that their approach is to "own what we own" and stick to their convictions, even during market downturns.

He expresses immense excitement about launching his own firm, describing it as an "11 out of 10" on a scale of excitement. He shares the overwhelming and gratifying response from former colleagues and industry contacts who have expressed support and anticipation for his new venture.

Humalis Investment Strategies Services

For those interested in learning more, the website is humalisinvestmentsstrategies.com (or humilisinv.com). The firm will offer research and will soon have portfolios available. They will operate as a portfolio advisory delivery only business, aiming to help people and run portfolios without competing for assets. Bellski reiterates his commitment to an old-school, relationship-based approach, including meeting clients directly.

The episode concludes with congratulations and well wishes for Brian Bellski and Humalis Investment Strategies.