Fast Company

As a manager of (OPENX Quote)OpenFund, the only mutual fund that's run live and in color on the Internet, I get lots of input from our Web audience -- that means questions, suggestions, praise and, of course, lots of criticism.

The most-frequent criticism I get is that we do too much short-term trading for OpenFund. It doesn't matter whether the trades are profitable or not, or whether the fund is performing well or not. Rain or shine, some people just seem to think that all short-term trading is bad.

What's so bad about short-term trading? If you have valuable short-term information, shouldn't you try to profit from it? Here's an example.

Last Friday, Maurice Werdegar, the light-speed portfolio manager responsible for most of OpenFund's short-term trading, noticed that Mark Mills was scheduled to appear on CNBC. Mills is one of the authors of the Huber Mills Power Report investment newsletter, published by the Gilder Technology Group. We know from experience that when the Power Report recommends a stock, that stock can move almost as much as when George Gilder picks one in the Gilder Technology Report.

Maurice made a small bet that Mills might talk up IXYS (SYXI Quote), one of the stocks the Power Report has recommended in the past -- and one of the most volatile. We've owned it before in OpenFund (and shorted it, too), and we always follow it carefully. Before Mills came on CNBC, Mo bought 3,000 shares at 76 1/4.

When Mills started talking on CNBC, he did indeed mention IXYS -- and that was enough to give it a little lift. Not much, but Mo was able to sell our 3,000 shares for 77 7/8, harvesting a profit of $4,875 (before trading costs). A small trade, a tidy little profit -- I thought it was a pretty cool deal.

But just a few minutes after Mo posted the trade on our Web site, a message appeared on our discussion boards asking, "Am I gambling or investing?" A little later, another appeared: "gambling on a mention from CNBC ... how pitiful."

Tough room, huh? Imagine what would have happened if the trade had lost money!

What's not to like about that trade? Mo saw an opportunity to take a rational risk on a trading idea in a stock we know well -- and it worked. Moreover, it was based on information that anyone could have put together, and made a few dollars from.

A Built-In Bias

All that was wrong with that trade is that it was short-term, based on short-term information. In fact, it was worse than short-term -- it was ... daytrading! And right now that's something that is very, very politically incorrect.

What's so bad about short-term trading?

Nothing, apparently, when a specialist on the New York Stock Exchange does it. Nothing, when a floor-trader on the Chicago Mercantile Exchange does it. Nothing, when a house proprietary trader for Goldman Sachs does it. Nothing, when a hedge fund manager like Jim Cramer does it.

But if I do it in the mutual fund I manage, or if you do it in your online brokerage account, the very same thing is bad. But while the traditional mutual fund industry does its best to convince you of this, how disinterested is this advice? Mutual funds compete with brokers for your investment dollars, and once they've got you, they want to keep you, with minimal labor on their part. What choice do they have but to do their best to convince you that all that trading you're doing in your online brokerage account is bad, and that a marriage for life to some stodgy old mutual fund that never trades is good.

The old media give you the same message every time they print another fire-and-brimstone sermon against the deadly sin of daytrading. They tell you so every time they print another worshipful story about Warren Buffett, treating him as though his long-term approach to investing will earn him a place in heaven right next to Mother Teresa. Why? Because the ink-on-dead-trees boys can't cover news that evolves as fast as the short-term information that moves markets nowadays.

I'll admit we do a lot of short-term investing in OpenFund. I mean a lot. In fact, it could be that OpenFund has one of the highest turnover rates of any mutual fund in America. But we do a lot of long-term investing, too.

We don't feel bound by the advertising appeals of the mutual fund industry, nor by the moralizing messages of the old media. We're trying to make money and manage risk for our shareholders, just like you are for yourself. As often as not in today's light-speed markets, that means investing for the short term on short-term information. And that's not bad.