Don't Be Fooled by Today's Triples

Two months ago, all I was hearing about was the prospect of a never-ending Dow death spiral. Today, I'm starting to hear some irrational exuberance, based on different variations of the "my stock tripled from the bottom" story.

This sudden transition from fear to greed is a nice case study in how quickly investor sentiment can turn, and a good lesson in how difficult it is to time the market. But it's also a true story.

A lot of investors really have seen triples (or better) in the span of just a few months. Here are 10 you've probably been hearing about:

Source: Yahoo! Finance.

Wow!
People who bought any of these stocks at the bottom made an absolute killing. If you're one of them, congratulations! But it's time to think critically about these stocks.

I wrote recently about finding 2020's 10-baggers. A 10-bagger in 10 years implies a very impressive 26% annual return. But that seems like peanuts when you realize that Palm and Dendreon have nearly scored the same total gain in less than six months each!

But wait a minute…
Don't be fooled by these quick increases, though. There's a reason why even master investors only target 15%-20% annual returns on their portfolios.

Remember that volatility cuts both ways: Today's triples may be tomorrow's thirds. Don't get caught up in the run-up of these stocks, thinking you can ride the wave to glory. It's important to judge an investment on today's prospects, not yesterday's price movement.

Many of the companies in the chart above still have serious risks that investors might be ignoring. MGM and Las Vegas Sands still have sizable debt loads and bankruptcy risk. Palm and its wireless partner Sprint have been rising in anticipation of the launch of their new Pre smartphone, yet they still face the same stiff competition -- from Apple (NASDAQ:AAPL) and Research In Motion (NASDAQ:RIMM) in Palm's case, and Verizon and AT&T in Sprint's. And don't even get me started on the banks.  

Should you head for the exits?
It's time to think long and hard about whether today's stock price has outstripped a company's prospects. If so, it may be time to sell.

But it's definitely not time to switch to a chaotic, trader philosophy. Follow these tips to stay out of trouble:

Don't look at the crazy quick returns in the table above, and think you can make your retirement in a matter of months. Under no circumstances should you start throwing significant amounts of money at Hail Marys: penny stocks with sketchy business models that trade over the counter, beaten-down companies with risky business models and/or indecipherable balance sheets, or companies you've never heard of in countries you couldn't locate on a map.

It's important to avoid the "double down" Vegas mentality. There's nothing wrong with doubling down on a beaten-down stock, but you should do so in a measured, sober fashion. Know when you're gambling, and know when you're investing. And don't confuse the two, especially after a multibagger success.

Keep an even keel emotionally. Don't get carried away when the stock market is up, and don't run to Treasuries when bad news arrives. (And it will.) Avoid manually changing your stock vs. bond allocation from your designated percentage, especially because of short-term events. Stick with what works for your proximity to retirement, your goals, and your risk tolerance.

Finally, don't even think about using margin to increase your stock exposure. No sneaky tactics, either, like cashing "convenience" checks from your credit card companies.

One last caution
At the risk of being annoyingly repetitive, don't get carried away by recent multibagger success stories. Remember these rules:

• Keep a long-term view.
• No Hail Marys.
• Don't make a double-down gamble lightly.
• Stick to your target portfolio allocations.
• No margin trading. Seriously, don't.

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Anand Chokkavelu always doubles down on 11. He owns shares of Apple and long-held shares of Citigroup. Apple is a Motley Fool Stock Advisor recommendation. Sprint Nextel is a Motley Fool Inside Value recommendation. The Fool has a disclosure policy.