Doug Kass: How Opportunistic Trading Can Boost Investing Returns

One of our subscribers to TheStreet Pro, JSR1111, asked an excellent question this week that I feel would help other readers.

JSR noted how I often mention meeting with corporate management teams in my research, yet, in recent years I've been heavily involved in trading.

"Even when you take positions you initially label as an investment and not a trade, they’re rarely held for very long esp if they appreciate quickly," added JSR.

JSR's point was well taken. The longer one goes out in time as an investor, the more likely equities will be rewarding. Stocks tend to recover from adversity and rise over most time frames.

Remember, stocks tend to rise over time. But with rising volatility and possibly limited market upside (trading range) and the short-term influence of machines and algos, trading provides an opportunity to supplement investing.

As Warren Buffett will tell you: "In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497."

So what do we do with these two ways of looking at stocks?

It is my strong view and investment methodology to combine investing and trading in order to deliver superior investment returns. The benefit of this dual process is to increase your odds for success.

No doubt, during discrete periods of time, investing may produce undesirable results. For example owning or buying "Magnificent 7" and other "compounders" in late 2021, turned out to be a virtual disaster 12 months later. But owning and buying the same in late 2022 delivered extraordinary returns -- up to several weeks ago. Where we will be one year from now is anyone's guess.

When of the view that the market is vulnerable, in a trading range or even in a bull market, trading can be a profitable endeavor. It does require a dispassionate approach, however, such as buying stocks earlier this week into the abyss has provided out-sized and quick returns.

To emphasize, I have owned and held short stocks for years, but I also try to ring the cash register through trades.

As Warren Buffett also famously said, "The stock market is a manic depressive."

Indeed, with the proliferation of passive products and strategies market volatility (even on an intraday basis) is likely to rise -- providing numerous opportunities for opportunistic traders. And when one has a bonafide sense of "intrinsic value" (with solid security analysis) the disparity between the current stock price (when valued under intrinsic value) provides opportunity to produce excess returns for the courageous and analytically-informed.

Consider, for example, my profitable trading in both Twitter's shares (several years ago before Elon Musk took it private) and over the last 1 1/2 years my profitable trading in Occidental Petroleum OXY (in total nine profitable "swing" trades). This also applies, when executed properly, with my SPY/QQQ Index trading. This all adds up!

To our observant subs like JSR1111, I will end by writing that TheStreet Pro contributors (and that includes myself) serve different masters. Some of those masters are investors and many are traders.

We try to appeal to both.

More Trading Basics:

At the time of publication, Kass was long OXY.

This commentary was originally posted Friday, Aug. 9, in Doug's Daily Diary on TheStreet Pro.