Martha Stewart: in most ways a 'normal investor'

Domestic diva Martha Stewart will learn her fate in court tomorrow, but behavioral finance specialist Meir Statman suggests that her real issues have long been decided and are not that dissimilar from those of every other investor.

Statman, a professor at Santa Clara University, performed a detailed analysis of Stewart's brokerage account activity and learned that the queen of better living is a ''normal investor" in almost every way.

That's not necessarily a good thing. Statman says Stewart's investment activity shows she is doomed to the results of a ''normal investor," one with a lot of great ideas that don't always translate to success.

In a paper just released on his website, Statman sizes up the lessons investors can learn using Stewart as a role model.

Portfolio size doesn't matter when an investor makes mistakes

According to the account statement entered into evidence, Stewart's account in December 2001 included 35 stocks valued at $2.4 million, with another $125,000 in a money market account.

Roughly two of every three stocks in the portfolio had unrealized losses at that time. Stewart ''lost money on Amazon, Doubleclick, Lucent, and 20 more stocks, as did other investors who concentrated their portfolios in dot-coms," Statman writes.

Many investors find it difficult to sell winners

Having a shot at the brass ring is different from grabbing it. Stewart was able to buy into a lot of initial public offerings, including Charter Communications, Digex, Agilent, Palm, and several others.

Stewart held her IPO shares rather than flipping them, a mistake that turned some giant gains into ugly losses.

Statman reported that Stewart bought 350 shares of Palm at the $38 offering price and sat still as those shares exploded to $95-plus at the end of the first trading day. She rode the shares all the way down to $3.47 per share when she unloaded them in December 2001.

Statman notes that this behavior is common, because no one wants to sell out, only to watch the stock they've just abandoned keep rising and proving them wrong.

Dumping losers in December is ''normal" investment procedure

''Normal investors harvest losses in December," says Statman. ''The best time to actually get out of a stock has nothing to do with the calendar, but people dump things in December because they wanted to have the most possible time for a turnaround before settling for the tax benefits of the loss."

In Stewart's case, documents showed that in December 2001 she sold all of her stocks with unrealized losses, except her shares in Martha Stewart Omnimedia, the company she founded and from which she resigned as chairman in June 2003. Statman's research showed Stewart's losses on the 22 underwater positions to be $1 million.

Her gain on the controversial ImClone sale was $167,000.

Investors who can't stomach volatility shouldn't concentrate their portfolios

Statman calculated that at the end of June 2000, Stewart's portfolio was worth more than $4.5 million, and that it suffered a loss of nearly 50 percent by the time it was sold. The Nasdaq Composite index lost just a bit more but the Standard & Poor's 500 dropped roughly 21 percent during that time.

''The fact that her portfolio was so concentrated and had so many dot-coms was really surprising," Statman says.

''I would have expected her to have more municipal bonds and to be worrying more about keeping what she had. Maybe the stocks she picked were more fun or maybe she had made a killing there when the market was going strong, but she didn't do much to be diversified."

Normal investors always believe they can spot winners, provided they have time to look

Stewart took some blame for her losses but also laid a lot of it on her broker, Peter Bacanovic. At one point, according to an e-mail entered into testimony, she told Bacanovic: ''The account is a mess. . . . I think it's time for me to give my money to a professional money manager who will take a bit more care about overall market conditions and political and economic problems."

Bacanovic, of course, was supposed to be acting as a ''professional money manager."

Says Statman: ''One of the elements that makes her behavior normal is that illusion of control that she has. She has a sense that she's got it -- the ability to pick great stocks -- if only she has the time."

Statman noted that the rising stock market of the late 1990s appeared to make Stewart feel smart and bulletproof, while the decline made her feel dumb.

Those common emotions often drive investors to change financial advisers or their investing habits.

''It's surely normal behavior," he says. ''All of us slow down for a few miles after we get a ticket."

Of course, Stewart has gotten a lot more than a ticket. Just how her sentencing will play out remains a guessing game, which is the one regard in which Stewart is not a ''normal investor."

Says Statman: ''If she truly were like everybody else -- the guy with $50,000 or even $500,000 invested but without her fame -- this whole thing would have gone away by now."

Chuck Jaffe is a senior columnist at CBS Marketwatch. He can be reached at jaffe@marketwatch.com or at P.O. Box 70, Cohasset, MA 02025-0070.