How a Botched Murder Investigation Can Make Us Better Investors
In 1998 Stephanie Crowe was murdered in her home. She was 12 years old.
The murder stands out to me because of her age, it happened in the town next to mine, it was gruesome, and her 14-year-old brother Michael and his two friends were arrested for her murder.
On the night of Stephanie’s murder, neighbors called the cops to report a suspicious person, Richard Tuite. He was knocking on doors and peering into windows looking for a woman named Tracy.
Richard suffers from schizophrenia and has a history of breaking into the homes of young women. Blood was found on the shirt he was wearing that night, but Richard Tuite was not pursued as a lead.
Most murder victims are killed by someone they know.
In 2020, for example, there were just over 21,000 homicides reported in the U.S. Of these, less than 5% of victims were female. Overall, less than 10% of all homicides were believed to have been committed by a stranger. Of the female homicide victims, the vast majority were murdered by a man known to them – a family member, intimate partner, or neighbour, for example.
The cops and the FBI agents at the scene believed the murder was committed by someone Stephanie knew and who was already in the house. Law enforcement zeroed in on Michael because he seemed “distant and preoccupied” while the rest of the family grieved. Michael was sick with the flu.
Unbeknownst to his parents, Michael was taken to the police station that night and interrogated without an attorney present.
The cops lied to Michael and told him that they found Stephanie’s blood in his room and some of her hair on his hands.
The cops lied again and said he had failed a “truth verification” process, a voice stress analyzer, and that Michael’s parents believed he killed Stephanie. Michael was initially interrogated for 3 hours and then another 6 hours without a break.
After the second marathon interrogation session Michael provided a vague confession to killing his sister. He provided no specific details, and he is on video saying “I’m only saying this because it’s what you want to hear.”
Michael’s two friends were also subjected to marathon interrogation sessions and similarly produced dubious confessions.
Michael and his two friends were charged with murder and conspiracy to commit murder. They were to be tried as adults and they spent 6 months in prison awaiting trial. A DNA test was finally performed on Richard Tuite’s shirt, and it turned out to be Stephanie’s blood. The charges against the 3 boys were dropped but the damage was done.
Why was this family tragedy made worse?
Because law enforcement succumbed to their confirmation biases.
They accepted all confirming evidence to their initial gut instinct and ignored all disconfirming evidence. Then they subjected young teens — teens raised to trust law enforcement — to long stressful interrogations designed to get the answer they wanted.
The sad fact is this is an all-too-common occurrence.
Yet the National Registry’s list of unequivocally exonerated prisoners notes that about 13 to 15 percent of them had confessed to crimes they had not committed.
From Mistakes Were Made (but Not By Me)
This is the danger of confirmation bias. The desire to get the answer you want not to uncover the truth.
The similarities between a high stakes murder investigation and investing don’t immediately stand out.
But money is how we operate in the modern world. It’s how we secure shelter, obtain food, and gain access to healthcare. It’s how we live. We must be disciplined with its care, or we’ll have less money to care for ourselves and our families. Or we could out live our savings. A major catastrophe.
For investment professionals it means investing in low-quality companies when we think it’s a high-quality company. It means sticking with value traps even when faced with evidence that we made a mistake. It means persistent below-average performance.
Fixing our Bias
How do we combat confirmation bias?
Yo Joe!
The first step is to G.I Joe it.
If we know we’re highly susceptible to our biases, then we can implement systems and safeguards to reduce their effect.
First, we need to slow our thinking down.
The initial problem with wrongful convictions is the lead investigators jump to a conclusion too soon because their gut tells them. Their gut instinct is built off years of experience, but the problem is once they listen to their gut, they close their mind. They become unwilling to accept disconfirming evidence and focus all their efforts on the wrong person.
Checklists
A checklist can be complicated, or they can be simple.
But the idea is to slow your thinking down and to make sure you have gathered all the relevant information needed to make an informed investment decision.
Kill Criteria
Identify before investing the reasons why you would close a position. Both positive and negative but mostly negative. So, when those reasons start happening, you're less likely to close your mind to them. You’ve primed your brain to be on the lookout for them and to make the correct decision when it matters.
Keep a Record
One remedy for false convictions due to coercive interrogations is to record all interrogations.
We can take a similar approach to investment decisions by writing down our investment thesis. What we think a company is worth, any potential catalysts, and our kill criteria. We want a record of what we were initially thinking that we can always cross-reference.
Devil's Advocate
It’s OK to read reports and listen to other people who are long the same stock as you. You can learn new things and increase your knowledge base. But you need to know that you are confirming your bias.
You want to balance this out with reports from those that are short your stock or those that were long but recently sold their position. The usual gut reaction is to dismiss their arguments. Don’t. Force yourself to listen and to understand them.
Julian Robertson was the sole portfolio manager at Tiger. And before he pulled the trigger on any investment, he would conduct bull vs bear debates. He would pit his analysts' report against his rolodex of business leaders. He wanted to get a full perspective on the issue before deciding.
You have to be careful here too.
Increased Post-Bet Conviction
The person who is short and the person who just sold their stock are also talking their book. They’ve put money behind their decision which erroneously increases their conviction.
A study was done with people making $2 bets at a racetrack. The people were asked how certain that they were that their horse would win before and after making a bet. Before the bet they were less certain but after making a small $2 bet their certainty significantly increased.
To help reconcile their increased convictions post-bet, the bettors come up with all sorts of new reasons as to why their horse is going to win. If your devil advocate has put money on their decision, they too need to reconcile their increased post bet conviction. One way to do that is to convince you to make the same decision as they did.
The best and last person you should talk to is the person without a position and who is still doing their research. They’re the most objective and the most open to constructive dialog because they have not made a monetary commitment yet.
And that is what the police did with the Stephanie Crowe investigation. They reopened the case and gave it to a new detective with no previous connection to it. His fresh eyes and uncluttered opinion saw the mistakes previous investigators made and his review of the evidence pointed to Richard Tuite.
