TV celebrity Martha Stewart’s insider-trading trial in 2004 provides some interesting glimpses into her experiences as an investor. Meir Statman, a finance professor at Santa Clara University in California, takes a look in Martha Stewart’s Lessons in Behavioral Finance.
Her Merrill Lynch account statement of December 20, 2001 was entered into evidence and shows 36 stocks and a money-market fund, worth $2,510,793 in total (dollar figures in U.S.). Twenty-three stocks had unrealized losses.
Portfolio loses half of value and she goes to jail
Statman traced Stewart’s portfolio back to June 2000 and calculated its value at $4,530,730. Her portfolio had lost nearly half of its value over a span of about 18 months. Then, after she was convicted of insider trading, she spent several months in jail. I wouldn’t be surprised if she has a rather low allocation to stocks now.
Indeed, in the days after December 20, 2001, Stewart sold off all but one of her losing stocks for tax purposes. “Just took lots of huge losses to offset some gains,” wrote Stewart in an e-mail to a friend. “Made my stomach turn….”
Favoured with hot IPO stocks
Stewart’s losses arose even though she was on “the privileged list of investors who were allocated hot IPO shares at their offering prices.” IPO stocks bought included Charter Communication, Digex, Agilent, Palm, and others.
“Ms. Stewart would have been ahead if she had flipped her shares on their first trading day or even weeks afterward,” writes Statman. “But she waited and watched her gains turn into losses.” For example, she bought Palm Inc. at the offering price of $38, watched it zoom to $95 on the first trading day only to sell it at $3.47 on December 21, 2001.
A most ridiculous sound — like a lion roaring underwater
Martha Stewart was not kind to her brokers. An email from the broker’s assistant reveals “Martha yelled at me again today.” In another email, he complained that she had hung up on him, adding that at one point she made the “most ridiculous sound I’ve heard coming from an adult in quite some time, kind of like a lion roaring underwater.”
Cognitive biases or lack of investment savy?
Statman describes several cognitive biases and emotions that interfered with Stewart’s performance. Instead, I would see her case more as demonstrating a lack of investment knowledge.
It appears she was not very aware of the “IPO cycle,” as most good investment guides would have warned her about. And the ill treatment of her broker suggests she naively expected him to be a seer who could forecast market turns and get her out ahead of the downturns.