Rocket Stock or Dud?

"The bigger they are, the harder they fall." It's the worst nightmare of every investor in today's market -- buying a rocket stock just before it takes a nosedive.

Every day, WSJ.com publishes a list of stocks whose shares have just hit new 52-week highs. And every day, investors read the list and tremble -- some with greed, others with terror. On our Motley Fool CAPS investing community, these top stocks usually enjoy favorable ratings, since everyone loves a winner. But what should you do when some of CAPS' smartest investors pan one of these hot stocks?

For starters, consider using the "52 week high" list as a starting point for further research. Stocks can rise for many reasons, but a little help from Motley Fool CAPS can make it easier to figure out how worthy those reasons are. Let's see what the more than 115,000 stock gurus (and counting) in CAPS have to say about the list's latest contenders:

Five stars = highest possible CAPS rating; one star = lowest. Companies are selected from the "New Highs & Lows" lists published on WSJ.com on Saturday of last week. One year ago and recent prices provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

"Everybody loves a winner"
So people say -- but this week, winners are rarer than turtlenecks on pigs. Just one stock -- one! -- hit a new 52-week high on Friday: National Western Life Insurance. (And in case you're curious, CAPS members hate it.)

So how is it that we even have a list of "52-week highs" this week? Because over on the Amex, at least, they don't just trade stocks, but ETFs as well. And some of those are soaring. But it won't take you more than a quick skim of the table above to learn that this is not good news. All five of the "stocks" listed above have one thing in common: They're all short bets against various market niches. And what does this tell us?

Investors are shorting the Naz. Shorting the Dow. Shorting commodities, midcaps, and industrials.

Big mistake. Huge.
CAPS members think this an extremely risky strategy. These ETFs have one thing in common in that they represent short bets, but they also have another: below-average one- and two-star ratings on CAPS. By massive majorities, Fools think it's foolish -- not Foolish -- to bet against the U.S. economy.

Sure, short-term (pun intended), this strategy seems to be working out. But remember: When you bet on a stock, your profits are potentially limitless. Thanks to the miracle of compounding, $1,000 can grow into $1 million in a matter of just a few decades -- because a stock that starts at "1" can eventually go to "11" and beyond. In contrast, the best a short bet can ever yield is a 100% gain, as "1" plummets hopelessly to "0."

Need more convincing?
Say you had a crystal ball five years ago. Say you knew that over the course of five years, Sirius XM Radio (Nasdaq: SIRI), Microsoft (Nasdaq: MSFT), Starbucks (Nasdaq: SBUX), and Yahoo! (Nasdaq: YHOO) were destined to lose value -- and so you shorted them. Want to guess how much money you would have made?

If you shorted $1,000 worth of stock in each, then five years' of shorting would have generated a combined profit of $1,080, as Sirius lost 69% of its value, Microsoft 10%, Starbucks 9%, and Yahoo! 20%. And that doesn't even include the dividends you'd have had to pay on Microsoft.

On the other hand, if rather than shorting these four stocks, you had bought just one great stock back then -- say, Apple (Nasdaq: AAPL) -- then the stock's 770% increase in value would have multiplied your take over eightfold versus guessing right on the short side four times in a row.

Foolish takeaway
The bears are hungry these days, and the shorts are rampant. But there's a reason Fools look askance at the short ETFs so popular this week: We know that over the long term, buying great businesses with strong growth prospects is the surest path to profit.

Time to chime in
Of course, the aim of this column isn't just to tell you what I think about investing, ETFs, or shorting. We also want to hear your thoughts. If you think now's the time to bet against the market, come on over to Motley Fool CAPS and tell us why.