Martha Stewart: Not a Good Thing for Me

If there are any behavioral economists or sociologists out there seeking compelling examples of people who never seem to learn important lessons, I invite them to look me up. Or better yet, just keep reading, as I'm about to make some embarrassing confessions.

Let's start with who I am. I write for a company that focuses on financial education and works hard to deliver superior investment ideas. I'm even in my 10th (!) year of doing so. I think that over the years, I've given out a lot of good advice to investors. I've even detailed many of my own mistakes in the hopes that others will avoid making them.

But here I am, 10 years in, and I'm kicking myself again for having made some more stupid mistakes. My latest blunders involve Martha Stewart.

Preamble
Let me begin by saying that I started out as not exactly what you'd call a Martha fan. Martha's vision of homemaking is fairly different from my own. On top of that, a friend who lived near her in Connecticut told me a horror story or two he'd heard about her temperament.

But then the scandal regarding her sale of ImCloneSystem (Nasdaq: IMCL  ) stock broke. From what I read about it, and from the seemingly much larger scandals abounding in the financial world at the time, it seemed to me that she was being over-persecuted and, ultimately, over-punished. After all, the whole matter involved a personal gain of hers of less than $100,000. It didn't involve, as so many other scandals of the day did, the implosion of many thousands of people's retirements or nest eggs. I began feeling bad for her, and even liking her, too.

Still, I had to wonder how the scandal happened. Among the tidbits I'd learned about her was the fact that she'd once been a stockbroker. So she certainly was by no means unfamiliar with the stock market, was decidedly not an unsophisticated dabbler, and was surely aware of issues relating to insider trading. Even if she did nothing wrong in her trading, it's hard to imagine her not being aware of how shifty things might look.

How could a smart person, familiar with the business world's workings, make such a stupid mistake? Well, when I look in the mirror, I see another smart person, familiar with the business world, who has made, and continues to make, stupid mistakes.

I got greedy
My latest investing blunder involves stock in Martha Stewart Omnimedia (NYSE: MSO  ) . Why did I buy it? You might assume that I'd studied the stock closely and was convinced it was trading at a significant discount to its intrinsic value.

No, that would have been sensible, but it wasn't actually the case. Instead, I was approaching the stock in a very speculative fashion. It was January 2005, and Martha was in prison. Her stock had fallen from a high of around $20 per share in 2002 to the single digits by 2003. Once she announced her plans included going to prison sooner rather than later, a weight was lifted from the stock, and it soared past $30 by December of 2004.

I was definitely aware of what was going on. There was rampant speculation. People were assuming the company's problems were behind it. They were expecting the stock to soar even more upon her imminent release. But they, too, hadn't studied the company's financials very thoroughly. I was watching from the sidelines and resenting the seemingly easy money being made. I decided to jump in. In January 2005, I bought 150 shares for about $28.50 each. Total cost: around $4,275.

I stayed greedy
Within a few weeks, the stock passed $36. My paper profit was $1,150, less my $11 trading commissions from Ameritrade (Nasdaq: AMTD  ) . I couldn't sell yet, though, because the Fool's trading restrictions for employees require me to hold any stock I buy for at least 30 days. No matter, I was looking to make even more money. By February, the stock hit a 52-week high of $37.45. My profit then: $1,343. I didn't cash in, though. I was being ruled by emotions and greed.

Here we are now, in October, and I finally sold just last month. From February on, the stock went down a little, up a little, and ended up more down than up. Every time it lost ground, I gnashed my teeth and waited, nervously hoping for a rebound. Every time it gained ground, I'd resolve to sell. after it gained just a littlemore.

I held on through her release from prison, anticipating that her "Apprentice" TV show's debut would push the stock higher. Well, anticipation of the show may have done that, but the show itself didn't debut to rave reviews. I finally couldn't take it anymore, and after the stock had hit a high of nearly $34 in September (my gain then would have been $800), I finally got out -- at $26.65 per share. My ultimate profit had become a loss -- of $275 (or 6%). At least I didn't lose my shirt -- only a few buttons.

Making matters worse is the fact that I bought the stock partly with money I borrowed from my brokerage -- "on margin," as they say. So all the time I spent waiting for the stock to go way up, I was losing a little each month in interest on that loan.

Smarter investors profited
Did everyone who invested in Martha's stock suffer? Not at all. Our own David Gardner selected it as a recommended stock for our Motley Fool Stock Advisor newsletter service way back in November of 2002, when it was trading around $10. He recommended selling it later, after it had risen some 60%. Had I invested my $4,275 then, I'd have made more than $2,500. (Learn about what other stocks David and his brother Tom are recommending with a free 30-day trial of Stock Advisor.)

It hurts to think of all the alternative investments I might have made. If I'd invested in ExxonMobil (NYSE: XOM  ) stock during this period, for example, I'd have made 22%. If I'd finally invested in Chico's FAS (NYSE: CHS  ) , as I've long been wanting to do, I'd be up 28%. Of course, whatever I invested in may also have lost ground during this period. I still have confidence in the Washington Post Co. (NYSE: WPO  ) , for example, but I'm currently down 12% on it.

What really matters for most of my investments is how they do in the long run, not over nine months. So this kind of thinking about what might have been is yet another example of wrong-headed thinking on my part. Perhaps my best what-might-have-been thought is that if I'd simply buried the money in my back yard instead of speculating with it, I'd have lost less.

Lessons learned
The lessons I gathered from this fiasco are myriad. And what stings is that I already knew them but chose to ignore them. Short-term trading is risky, because no one knows what the market will do tomorrow, or even this year. Investing on margin is extra risky, and it's good to have a decent margin of safety if you do it. (Learn just how dangerous it is.) It's really important to buy and sell based on your estimation of a stock's true value. And if you don't have the time or interest to make such determinations, consider just sticking with an index fund or choosing stocks that have been vouched for by people who have done a lot of research. (Might I suggest some of our newsletters, which advise you when to get in and out of promising stocks and funds? You can try them out for free.)

Another lesson learned is just how powerful psychology can be. It was largely behind the run-up of Martha Stewart Omnimedia stock, and it was also what kept me tethered to the stock when I had no business owning it in the first place, given my lack of research on it.

You, too, can learn
Learn more about the role our brains play in our financial futures in these articles:

SelenaMaranjian'sfavorite discussion boards include Book Club, The Eclectic Library, and Card & Board Games. Sheowns shares of Washington Post Co. For more about Selena, viewher bio and her profile. You might also be interested in these books she has written or co-written:The Motley Fool Money GuideandThe Motley Fool Investment Guide for Teens. The Motley Fool is Fools writing for Fools.


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