Comments (11)

• Doug Smith

• Martha Stewart's other "crime" was threatening the popular delusion that there is no asymmetry between people like her and anonymous investors who give their money to people they don't know in industries about which they have no clue.

• Published: March 17, 2004 8:36 AM

• Joe Potts

• In Stalin's Soviet Union, Mao's People's Republic, and other such regimes, it's always wiser, when accused of a crime by the state, to confess. This heads off both conviction and torture.
  However, since you've confessed, you are "guilty," and you remain imprisoned. If you wish further to regain at least whatever freedom you seemed to have prior to incarceration, you must identify the other spies and traitors who were working with you.
  This is a very familiar formula, and it can very plainly be seen working among the defendants and witnesses of this case, right here in America, the home of the free. Stewart, I suppose, can't finger anyone else for her own benefit.
  Or maybe she just refuses to.

• Published: March 17, 2004 9:11 AM

• DBowman

• Martha has taught me a valuable lesson and I hope corporate America is paying attention. Name,rank and serial number is all I ever intend to furnish to any "G-man" inquiries that I might be involved with. If they think I've committed a "crime" they can charge me and haul me before a jury, but I'll not help "braid the rope" with which they intend to hang me. Call me "Sgt. Schultz". I see nothing, I hear nothing, I know nothing.

• Published: March 17, 2004 11:42 AM

• David Heinrich

• quote from "Communism in Capital Markets":
  --------
  If investors are too stupid to grasp the information conveyed by a sale, they should not be investing in the market.
  --------

  (note: if someone is too stupid to grasp the information conveyed by a sale, they aren’t investing at all, but are speculating). While I agree with Ilana Mercer in general on this issue, this statement needs a little bit of qualification. There are several reasons why a shareholder may sell his shares of ownership in a company:

  (1) He may think that the share price will go down, due to either: (a) factors beyond the company's control; (b) deterioration of the quality of a company.

  (2) He may think that he can find a better investment elsewhere, that may produce more rapid profits.

  (3) He may think that he can find a more secure investment elsewhere, that, while not producing larger profits, will be less volatile. This may mean larger, more established stocks, real estate, or bonds.

  (4) He may want the money.

  Whenever someone buys a share, they should know that these are the reasons why people may be selling. If they do not know at least this, then they are not investors, but speculators, and most likely poor ones (there is intelligent speculation, however).

  If the intelligent investor buys a share, he is stating his belief that the company is going to do well, thus he believes that if the seller sells because the seller thinks the company will do poorly, the seller is wrong. If the intelligent investor is buying from someone who's selling to participate in a better opportunity, the intelligent investor is doing this simply because the investment he's buying into is the one he knows about. The last two reasons a personal, and are not of the concern of the buyer.

  As Benjamin Graham noted, many people who call themselves "investors" are actually speculators. People invest in mutual funds without reading the prospectus, without looking at the track-record of the manager, without considering the manager's tenure, and without considering the manager's investment style and if they agree with it. Why? Because they see that the mutual fund has grown 100% in the past year, or averaged 50% over the past 3 years. Performance should not be ignored, but short-term performance is not a solid way to determine the suitability of a fund; perhaps 10-year and/or life-of-fund performance.

  There are the performance chasers, who hop from one mutual fund to another as if they were grasshoppers in the summer. Also speculators, not investors.

  I will use a personal example. I have been invested in Fidelity Select Electronics for several years; my great Uncle has been invested in it almost since the inception of the fund. I've also been invested in Fidelity Low Priced Stock, and Fidelity New Markets Income (planning on also having some in Select Gold). What happened in the near past with Select Electronics was an unbelievable amount of growth in a year (http://tinyurl.com/2t2v6). As can be seen from the graph, from 1998 to the end of 1999, the fund almost tripled in worth. Then it plummeted. As the fund was growing astronimcally, there were surely numerous investors drawn in to it, most likely near the top of the explosion. Rather than dollar-cost averaging into the fund, they probably plopped many thousands of dollars into it, and are now burned. People who just put their money into this fund based on some performance-chasing fund-hopping were not investors, but speculators. Those who, however, have been in the fund for the long-term, dollar cost averaging in and patiently waiting out the bear phases, have been rewarded by a growth rate of 19% over the last 10 years, despite averaging an annual 10% loss over the past 3 years.

  Furthermore, the investor who balances his portfolio with discipline would not have been burned so much, as he would have periodically rebalanced between all portfolio holdings. If one adopts a methodical, yearly approach to rebalancing, these kinds of blows can be softened. For example, rebalancing yearly in January to obtain a ratio of 25% FSELX, 50% FLPSX, and 25% FNMIX.

  That's just the insanity regarding mutual funds. It gets even worse for individual stocks, as J. Zweig noted in his chapter-by-chapter commentary on Ben Graham's "The Intelligent Investor (Revised Edition)", “investors� (speculators) had been buying stocks based merely on their ticker symbols! They weren’t buying partial ownership of companies; they weren’t even bothering to find out the names of companies; they certainly didn’t know anything about the companies they were investing in. They were playing a video game. Juno.com announced it’s business plan, which went something like this:

  1. Make a good product that people will want.
  2. Give it away for free.
  3. ????
  4. Profit!

  Somehow, this “plan� inspired great confidence, and the stock price quadrupled in two days, when what really should have been happening is that the stock price should have dropped like a rock (sanity later kicked in, as the stock price sank to around $1 6 months later). Really, these people were advertising their own incompetence in business. They shout out at the top of their lungs that they’re complete idiots, and this is somehow looked at as divinely inspired. Now, who do these speculators have to blame but themselves? You can’t even call them speculators. Speculators speculate in companies that have the potential for enormous profits, not the certainty of enormous losses. Those who placed money in these kinds of companies can only be called idiots.

  The same holds for the speculators who buy shares of companies that they know nothing about, other than the name of the company, some rumors, and a few of the products it makes. Investors perform security analysis (Graham) of the companies they’re considering investing in, and do detailed research into the company’s executives, employees, suppliers, customers, products, competitors, and field (Fisher). This allow them to find values, and companies that are excellently run, thus probable to continue growing.
  

• Published: March 17, 2004 12:03 PM

• Skip Oliva

• What we saw in the Stewart case is nothing more than an adaptation of techniques successfully used by the government in antitrust cases. Most antitrust cases are settled by direct coercion: The government brings a civil case, but tells defendants if they don't settle immediately, they could be held liable for criminal charges. Most antitrust cases also rely on violating the First Amendment. Antitrust cases often do not involve actual conduct or restraint but free association and expression. For example, persons labelled "competitors" by the government may not speak to one another about certain topics without advanced government permission.

• Published: March 17, 2004 2:09 PM

• jim

• I'm glad to see that I am not the only person who thinks that Stewart & Bacanovic may actually be innocent. The whole case worries me--if this can happen to someone rich and successful then it can happen to anyone. The evidence was so thin, and in spite of all the post-hoc criticism, I thought that the defense did a good job of showing how thin it was. But the jury bought the prosection's story hook line and sinker. I don't think the justice system has grappled with the fact that famous people cannot get fair trials in this country--remember OJ? I'm not sure how to correct this. Admittedly, there is little interest in trying to change the system. As flawed as it is, both defense attorneys (in the case of OJ) and prosecutors (in the case of Stewart) have much to gain from the current state.

• Published: March 19, 2004 9:54 AM

• Clayton

• One must be too smart to conclude that Martha Stewart was innocent. The rationale (if that is what it is) in this article could excuse many crimes. She was given opportunities to escape with a fine, but her arrogance led her to her own disaster. Someone must possess the same arrogance to feel sorrow for Martha.

• Published: March 19, 2004 5:38 PM

• Lee

• There's an excellent New Yorker article by Jeffrey Toobin that tells the Martha Stewart story.

  While I'm opposed to "insider trading" law, and while I abhor the tactics that were used against her to obtain a conviction, it's really hard to come away from the article without admitting that Martha was active participant in her own prosecution. The previous poster is wrong, though. The best "deal" they gave Martha involved a felony conviction with probation or house arrest at the very least; there was never a promise of no prison time.

  http://www.newyorker.com/fact/content/?040322fa_fact1

• Published: March 22, 2004 12:17 AM

• duodecimal

• I was surprised to see something over on the lewrockwell blog a week or so ago, against a defense of Martha Stewart, that I don't recall being directly rebutted. I wonder if the rebuttal I would have offered is valid.

  Charley Hardman said over there on March 8th that this was not a 'victimless crime', that whoever bought the shares suffered.

  Now, I thought that in order for someone to be harmed in a crime, they or their property had to be damaged. Since when is the value of a stock considered covered by property rights?

  You don't have a right to the value of a stock any more than you have a right to the value of anything else, because valuations are all subjective. If a newspaper printed a story about a murder in a house you were trying to sell, you'd be able to sue them for 'damaging' the value of the property at the price you were trying to sell it. It's absurd. Prices aren't rights.

  Hopefully I won't need to go into exactly what property rights are part of a stock holding.

  Why isn't this part of any of the big pro-Stewart defenses? Am I wrong?

• Published: March 22, 2004 6:32 AM

• jim

• I'm not sure that I feel sorry for either Stewart or Bacanovic; well, I do feel sympathy for anyone fearing prison. As for Toobin, like everyone else before the trial, he decried the government's evidence, and, now, like everyone else, he points to the overwhelming evidence against the 2. That's where I get confused. The government pointed out many inconsistencies between Stewart's recall of events and Bacanovic's recall. Is that evidence? When exactly did Stewart & Bacanovic conspire? One can assume that the conspiracy occurred during one of their many phone calls, but this requires belief in every aspect of the prosecution's characterization of events. Is an assumption all it takes to get convicted? Finally, I can't get around the contradictory jury rulings. If they believed that the $60.00 story was a lie, then it follows that the Bacanovic worksheet was also a lie--forged. But the jury acquitted him on making false documents. How can they say that the 2 lied and conspired to lie when the written product of the lie and conspiracy was not deemed false?

• Published: March 26, 2004 11:52 AM

• Duodecimal

• I completely missed the point of the Hardman post I mentioned. Ignore my idiotic confusion.

  The post mentioned is here: http://blog.lewrockwell.com/lewrw/archives/003867.html

• Published: April 12, 2004 8:11 AM