Consider the Source

In his 1970 book “Ball Four,” which chronicled the life of a baseball player, ex-Yankees pitcher Jim Bouton related a vignette about a fringe major league catcher named Greg Goosen. Goosen had been a NY Mets prospect in the mid-60’s. In those days if you couldn’t make it with the awful Mets you were sentenced to a career in the minor leagues and that’s where Goosen ended up. According to Bouton Goosen himself related Mets’ manager Casey Stengel’s verdict on him: “We have a fellow in spring training name of Goosen,” Casey related to the press when Goosen was just breaking in, “twenty years old. And in ten years he has a splendid chance of being thirty.”

Bouton and Goosen crossed paths in the minor leagues. One night on a base hit to the outfield catcher Goosen stormed out from behind home plate screaming at the top of his lungs, “second base, second base,” trying to get a young outfielder to throw the ball to the correct base. The outfielder completely ignored Goosen and threw the ball home to try and catch a runner instead. Goosen was visibly disgusted and from the dugout Bouton yelled, “But Goose, he had to consider the source.”

This morning analyst Richared Bove advises taking profits on bank stocks because they are “trading on fumes” and fundamentals have not yet improved. He argues that investors are bidding up shares because of a change in psychology towards the stocks as opposed to a change in earnings.

While they do not have the fundamentals we look for in market leading stocks the fact is that the rally off the March bottom has been led first and foremost by financials. Given their gains Bove’s suggestion makes sense to the “thoughtful” investor. After all, when a stock moves higher quickly it only seems logical that it should come back to earth. But this kind of thinking is the reason why most traders and investors are unsuccessful. They avoid buying stocks that have moved aggressively higher during market uptrends because they are “extended,” when these are exactly the stocks they should be focusing on, seeking entry on the proper kind of market pause. And if you are invested in a big winner the worst thing you can do is sell it to buy shares in a stock and sector that has underperformed.

Bull markets are built of many things. But the paramount ingredient is psychology. Markets begin turning higher before earnings improve and usually top before the business cycle concludes. To not grasp this most important fact is to insure an unhappy trading career.

We’re not arguing to buy financial stocks here. And we’re not claiming that the market uptrend will continue. But we don’t believe you should sell a position in a winning stock or sector until the market sends you signals that it is becoming exhausted, and as of this writing we don’t have those clues. To call for selling a big gainer because of misplaced psychology is to misunderstand the dynamic behind the markets.

Mr. Bove is no doubt a decent and sincere fellow. But he is the same analyst that consistently recommended purchasing financial stocks as they melted throughout the summer and autumn of 2008. On his recommendation people bought shares in many financial stocks at that time and watched their investments in Lehman and Bear Stearns go to zero and Citigroup and others lose almost all of their value.

For those investors who believe that Mr. Bove’s advice is “thoughtful,” we recommend considering the source. The kindest thing we can say about Mr. Bove, who is 68, is that in ten years he has a splendid chance of being 78.