Micro is PARTIALLY correct, but it is ENTIRELY possible to do "damp sanding" on paper tube rockets, CA-hardened balsa parts, etc. and be extremely successful.
First, yes, WET sanding is a technique used mostly on antique cars and stuff where a "mirror finish" or "mile deep paint job" is desired... I know because I've done it, helping a buddy who restores '50's classic cars. Usually it's done with a very fine grade of sandpaper (usually starting around 800 grit and usually up in the 1000-2000 grit or even finer range) and with a garden hose, trickling a little water to help flush away the paint particles, keep the surface cool and lubricated, and prevent the sandpaper grit from "loading up" or "gumming up" and ruining the paper.
HOWEVER, the same technique can be used on rockets using much less water. Personally I call it "damp sanding" because it uses less water than you want to use for true wet sanding, obviously because the paper tube and balsa construction of rockets is sensitive to water, and you don't want to get them SOAKING wet... I've done this on DOZENS of rockets and it DOES work, and work extremely well, despite what self-appointed "experts" may claim... The key is to use as little water as possible. After priming the rocket with 3-4 coats of a good WET-SANDABLE primer (YES, despite assertions to the contrary, THERE ARE SUCH PRIMERS-- I've even posted a picture of the can on here before to prove the point when snipers from the peanut gallery started all that tripe about "you cannot wet sand primers EVER!") and allow it to dry overnight (depending on your local painting conditions of temperature and humidity, and how you apply it, and the material used your drying time may be shorter or longer) I sand it with 220 grit to get the surface level and smooth, using small circular strokes and ALWAYS keep the paper moving-- DO NOT sand in one spot. Also, do not sand in straight lines-- that cuts in sanding scratches. Sanding in small circles minimizes that. Also, DO NOT press down hard on the sandpaper-- use a light pressure, and let the grit of the paper do the work-- heavy pressure merely generates heat, which is wasted energy, and heat softens the primer and makes it gummy, and loads up and ruins the sandpaper.
Then, I follow with a "damp sanding" using a roughly 2x4 inch rectangle of 400 grit, dipped in a bowl of water and the excess water allowed to drip off, and then lightly daubed on a towel. Again, sand in small circles, keep moving and don't stop on any one spot, and use light pressure only. As you work, the sanded off primer dust will form a "sanding mud" that lubricates the paper and keeps it from sanding too deep, and makes the finished surface MUCH smoother... as you keep sanding, it will get thicker and thicker with additional particles sanded off the surface, so occasionally you'll want to stop and wipe the surface off with a damp paper towel, then a dry paper towel and inspect the surface. Also, the "sanding mud" will get to where it starts to clog the paper-- a quick dip in a bowl of water and running your thumb over the grit a few times will loosen these particles from the grit and allow them to be washed away. Shake off the excess water, daub it lightly on a towel, and resume sanding. If it's TOO DRY, you'll know it because the sanding mud will be very thick-- dip your finger in the water and put a drop of water on the surface where you're sanding and you'll see an immediate improvement in performance.
To inspect the surface, hold the tube or part up toward a bright light source across the room-- a lamp, brightly lit window, etc... and rock the part back and forth, and slowly turn it. You should see a "glint" of light reflected off the tube or part-- watch this "glint" of reflected light. If it's wavy, you know the surface is uneven. If it's broken or misaligned, you know you have flat spots or irregularities in the surface. If it has small dark spots in it, you now you either have embedded "nibs" of dust or other crud in the finish, a rough spot, or small pits or voids in the finish. If it's dull and broad, the surface is still rather rough; if it's shiny and narrow, you know the surface is very smooth and even. You can tell more from the glint of reflected light than you will EVER be able to tell by "feeling" the smoothness of the surface. Go back and fix any spots that need more work using the same techniques until you're satisfied with the finish. You can make primer SHINE if you take your time and do it right-- and before someone says "paint won't stick to primer sanded to a shine-- it has to be rough" I can tell you FROM EXPERIENCE it will stick just fine for regular rockets-- the primer will still have enough "tooth" (surface texture) for the paint to bond. If you're talking about mach-plus rockets, then you might want to consider leaving the primer duller (more tooth) to maximize adhesion, since those surfaces will see EXTREME conditions. (but for regular rockets, these techniques WORK PERFECTLY WELL, despite the naysayers... I know FROM EXPERIENCE).
Once you've achieved the desired surface finish on the primer, wipe the rocket off with a damp paper towel to remove all sanding dust, then dry the surface off with a dry paper towel, allow to air dry an hour or two (depending on conditions) or overnight if you prefer, and then you're ready for your color coats. IF you apply the color coats CORRECTLY, you will come out with a smooth, shiny, glossy finish (or a smooth, even, terrific finish if you're using flat colors say for scale-type rockets) that will need NO FURTHER sanding or smoothing to look really good. The main thing is to get the paint on smooth, even, without drips, runs, sags, dry spray, orange peel, etc. This is where good painting techniques and skill developed from practice are indispensable, and using good, REPUTABLE brands of paint with good nozzles, good, well shaken cans (if you're using rattle cans), and warming the paint up 30 minutes before spraying to raise the vapor pressure (atomization pressure, which the higher the pressure the more finely atomized the spray paint will be) and lower the viscosity of the paint, which will ensure the best possible spray pattern and application (coupled with good spraying techniques).
Of course if you want a "mile deep" paint job, you can always follow up with additional steps of color-sanding or buffing and polishing the paint to make the color coat layer glass smooth and give it that "wet" look... and of course you can follow up with your desired clear coats, polish coats (such as "Future" floor finish, "Nu-Finish" and such, etc.) if you desire. Personally, once the color coats are on, I don't bother, because it looks terrific just holding the rocket in your hand, and of course it's going to look even better sitting on the pad 30 feet away... LOL
It's all up to you... how you finish your rocket is your business, and of course if you're not comfortable with these techniques-- if your individual skillset lies in different techniques, of course you should USE WHAT WORKS BEST FOR YOU. There is no single "one way" that it HAS to be done, despite what SOME FOLKS would have you believe, and spend their time belittling anything different from what THEY do or advocate. It's much like the arguments over whether to use water-based Carpenter's Wood Filler on balsa or using Sig-Coat or other solvent-based "sanding sealers"-- use whatever works best for you, because good results can be obtained with EITHER if you use them right.... same goes in large part with the arguments over glues (though of course different glues have different strengths and weaknesses and techniques play a big part as well, and some are better suited for some jobs than others).
There's no need to be afraid to use "damp sanding" on paper tube and balsa rockets-- as I said, I do it ALL THE TIME and never have a problem-- just DO NOT sand all the way through the primer coat, and don't damp sand unsealed balsa-- CA glue does a good job of sealing off balsa wood by soaking into and hardening in the grain pores of the wood. I finish fins (usually) by papering them with printer paper glued on with a THIN coat of white glue, so I don't have to do a lot to finish them. Cones and transitions are hardened with CA, sanded with 220 grit followed by 400 grit dry sanding until smooth, and then primered. I damp sand those parts separately to keep moisture away from the un-CA-hardened shoulders of the cone or transition, and keep the moisture to a minimum near the tube ends, where the glassine that seals the paper surface stops. The only "trick" is to use NO MORE water than absolutely necessary-- with a little practice and observation it's EASY to tell if you've got too little water, and adding a tiny bit more with a finger dipped in water is SO easy... If you want to try it, get a cheap kit on clearance or on sale and build it and try the techniques out... I think you just might like it. After trying a lot of different things, this is the EASIEST way I've found to get a terrific finish and produces the best results, FOR ME. If you follow the hints I've given, I'm confident it'll work well for you too. Ultimately, however, how you choose to do things is up to you...
The real trick is to find techniques that you're comfortable with and good at, and practice, practice, practice...
Best of luck! OL JR