Reality as Told by the Trader, Part 4

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Editor's note: This is the final installment in a multipart series. Please check out Part 1, Part 2 and Part 3!

Is it duplicitous to play the dream stocks for a trade? Is it violating some internal code of conduct, some beautiful combination of rigor and dogma to get long them now and then? Yes, if you are thinking like a pristine academic or if you regard the stock market as some high-end morality play that must be worshipped and not altered. No, if you think this is about money, which, last time I looked, it was.

Part and parcel with this whole new era of investing is the notion that mistakes have been banished the moment you buy. If you "researched" the stock -- meaning that you looked at a research report (and we know now that, according to the ads about online trading, that's doing rigorous due diligence) -- then you can safely assume you are home-free. If the stock goes down, it is the fault of an aberrant market. After all, you have made your mind up. If Warren Buffett can buy and hold and get rich, so can you. If Peter Lynch says you just have to like something a lot to own it, then who the heck is Cramer to tell you that you might have to sell it?

Ahh, there's the rub. First of all, I am a nobody compared with Buffett and Lynch, which is just fine by me. But our firm has compounded at 24% net after all fees for 14 years so maybe, just maybe, we know something. I have been at the game for long enough to know that sometimes it is about survival. That's why you read me. You don't read me because I woke up one day and appointed myself expert in wise behavior. And you don't read me because I am a bull market player. You read me because I have a track record of making money in good and bad markets. You read me because I was in cash for the crash of 1987 and made money in the 1990 and 1994 markets, both bear phases like this one. And, yes, maybe you read me because I was too cautious in 1998, still made money, but was too cautious, and learned something from it, too. Finally, you read me because I tell you what a professional is doing, day to day, which has some value when many amateurs have disappeared from the investing firmament because they didn't know what professionals did in tough times because nobody ever saw tough times before who just got in this game.

Sanctimonious? I don't know any more. If I sit and wait for some journalist to write about why TheStreet.com is valuable, to point out that it has successful money managers like me writing about their jobs and helping you make money, I might as well just give up. In the literally thousands of articles written about our venture in the last three years, not one has ever said, "Maybe you should listen to these guys; they are good at what they do. Better than we are."

Second, Buffett never told you to buy and hold. He bought and held giant positions during a fantastic bull market and, boy, was that ever right. He has purchased his share of stinkers, however, and he sells them when he realizes he made mistakes. Sometimes at losses! Yesterday he announced a big stake in USG(USG Quote). If the plaintiff's bar that works in favor of the asbestos-harmed classes has its way, Buffett will take a huge bath in USG. That's just the way it is. Maybe he is more powerful than they are. Terrific. If he isn't, he will lose everything that everyone else has when they invested with managements that made asbestos or touched asbestos or thought about asbestos at one point in their executive lives (yes, it seems that tenuous to me.) Buffett's investment style is not easily emulated, despite all of the books about him. If it were, I guess you could say we would all be rich.

Third, Peter Lynch had the the greatest collection of investment minds ever assembled to bounce his ideas of off. He had unprecedented access to management. He is incredibly smart and trenchant. He is like that other great Bostonian, Ted Williams. He can teach us how he hits, but we can't hit like him.

In business, things change. One minute DRAM prices are going through the roof, next minute they go through the floor. One minute a company that does community chat gets a $4 billion bid and another gets an offer from General Electric, the next minute they both are worthless. One minute telco networks are the greatest customers ever, the next they are the scourge client, demanding that you pay them to take your equipment (oh, by the way, that's called vendor financing). One minute the auto companies can't make enough sport utility vehicles, the next minute, they have 90-days-worth and can't give them away. One minute Cisco is the king of all companies, the next, its price target is lowered because the business is no longer as robust as it might have been. That's just the way it is.

So, of course, I will trade the dream stocks to the long side if it can make me money. Why not? That's not a mercenary's trade. That's a trader's trade. And if there is new news that puts some hair on one of these dream stocks where it wasn't before, I will trade it to the short side. Flexibility, not dogma, is key.

If you think that's wrong and you only want to buy and hold, try to buy and hold stuff that doesn't go out of fashion, with good balance sheets and good management. But accept that you might be wrong. If you can't, there are literally hundreds of thousands of alternatives out there: mutual funds, brokers, investment advisers, exchange-traded funds. You name it. You don't have to own stocks. And if you want to trade, trade. With the rules that professionals use to avoid big losses and let gains run. The stuff we talk about here every day.

Please, no matter what accept that flexibility, not dogma, is king in trading. Stop judging. Save that for the rest of life. This, in the end, is just money.