To me, being in the world but not of the world means that despite the fact we live amongst and congregate with worldly people, we must always remember that we are not one of them, we are citizens of God's kingdom (Ephesians 2:19) living on Earth as ambassadors of Christ (2 Corinthians 5:20). That does not mean we need to live a life of sacrifice, abstaining from all that brings us pleasure in this world; it means that as much as we may enjoy things of this world, we should never forget who we really are and what our mission is.

Pretend you are a spy sent to a foreign land to convert the locals to your ideology. You can mingle with the foreigners and enjoy all their country has to offer, just never take your eye off the goal, never forget that you are there for a mission and you aren't one of these people, you are there to convert them to your cause. That's the way I view it, we are God's secret agents, sent to an evil world to get them to switch sides and fight the good fight.

I don't believe being in the world but not of it implies any sort of life of abstaining at all. That's not to say there aren't things we should abstain from, surely there are, but rather that the specific verse in question is talking about something entirely different.