Remember Why You Trade

• ByTim Melvin, RealMoney.com Contributor
• On 2:00 pm EDT, Friday August 14, 2009

Last weekend, my brand-new BlackBerry froze. The operating system just locked up and dumped all my data, including phone numbers. Naturally, backing up the system was on my "I will get to it later" list, so I had to rebuild my entire contact list. I sent emails to everyone asking them to give me a call or send their phone number to help me do this. One very pleasant unintended consequence was that I heard from friends I had not talked to in some time. (I have been fortunate to build up a network of very smart friends and associates over the years, and I really should call them more.)

I heard from one of those friends last night. He lives out in Wisconsin for some unknown reason, but he's nevertheless one of the smartest guys I know. He has done very well in the markets over the years and he's taught me a lot. After the usual Packers vs. Ravens conversation, our discussion turned to the markets. We both share a cautious outlook and are somewhat dismayed by the politicization of the stock market that we see today. In spite of that, we both had ideas that we thought the other should be buying. He is very tech-savvy and had some insights into that sector. I shared some of the incredible micro-cap bargains I had purchased of late.

He then said something I am thinking of having stitched into a pillow or tattooed somewhere: "The point of all this, Tim, is not to just describe the market. It is to make money." No matter what the market backdrop or economic outlook is, there are ways to make money. Even in the extended markets of the late 1990s, I could find a few stocks trading below asset value or identify intriguing arbitrage opportunities. The same is true now. I am scared of the potential for the market to dive, but a few cheap stocks are lying around. If I do the homework and am sure of my valuation, I have to force myself to buy them.

The object of the game is not just to be right. As I have said in the past, the goal of a long-term investor or trader is first to survive and then to profit. The market gives you a chance to do that every day: I am finding stocks that trade below book value and are profitable with good balance sheets. While it is true that my position size is smaller than it might be in normal times, I do own some of them. I've found a few arbitrage and special-situation trades this year, and I have forced myself to ignore my market fears and take the trades.

My stock market view has never made me a dime. Finding a stock like West Marine trading well below book value when its largest competitor has gone out of business has made me money countless times. Noticing that the restaurants I frequent were empty and casual-dining stocks were too high has made me money. The put spreads I bought in Cracker Barrel , Brinker and other casual-dining stocks have worked as the stocks went down while the market rallied. The simple observation that the increased issuance of government bonds was going to pressure bond prices has led to one of the best trades of the year -- the long-bond iShares 20+ Year Treasury Bond Fund ETF has dropped by 30 points since the first of the year.

My primary goal each day when I grab my coffee and boot up the screen is not to have a market opinion -- my job is to find ways to make money. The market backdrop may influence my position size at times, but no matter what I think about the market level, if I find a company trading for below net cash, I buy it. The great part about being a deep-value investor is that the market will make its own prediction. When it has fallen sharply, I find a lot of situations I like and my portfolio fills up naturally. After a rally, I find fewer good openings and the stocks I do hold reach levels I consider overvalued, so I naturally trim my holdings. This happened with the infrastructure stocks this year when stocks like LB Foster and Granite Construction went from cheap to expensive quickly and I sold the stock I bought in the October selloff at a profit. My decision had nothing to do with my market opinion -- the stocks were cheap when I bought them and fully valued when I sold them.

I should probably stop looking at the broad market. I do not need the market to tell me that when good companies like Corning and Tecumseh are trading below book value, I should buy them. That's why in addition to cooking up the requested soft crabs and sweet corn this weekend, I will be sifting through 13-HF and 10-Q filings to find stocks that I think are too cheap not to own.

In the long run, it is the ideas generated from research like that -- not my market opinion -- that makes me money.

Buzz up!