I am a fan of science fiction movies (only Hollywood and not Indian fantasy ones).
And there are many that I have already watched several times.
One such movie is World War Z (read more about it here). The movie is about how Brad Pitt tries to protect everyone from a zombie apocalypse.
In one of the scenes, an Israeli agent tries to explain how his country Israel has been able to protect itself from this apocalypse, unlike the rest of the world.
According to him, there is an Israeli council having 10 advisors that look into various issues that the country faces.
Now here is the interesting part.
If 9 out of 10 advisors analyze an issue and come to the same conclusion, it is the duty of the 10th man to disagree and actively look for evidence to the contrary.
In the movie, it was this 10th Man Rule that helped Israel prepare for the zombie attack and build a high wall around the city to keep out the zombies.
I personally found this approach quite practical and useful.
To put it simply, if 9 out of 10 people reach the same conclusion after looking at the same set of information, it is the duty of the 10th person to look for evidence to disprove them.
I don’t know whether such a 10th Man Rule exists in Israel or not. But this rule makes a lot of sense.
The idea of this 10th Man Rule is to avoid unwanted surprises and be prepared for black swan events (low probability events).
Agreed that idea portrayed in the film about zombies is extremely far fetched.
But lets focus on this 10th Man Rule – which I think can help us in our investments too.
Think about it.
We as investors tend to move in herds.
If markets are going up, we believe that they will continue to go up. If they are going down, we think that the fall will never end.
But smart investors act like the 10th Man and question this herd behavior of other people (9 others if we refer to the people in 10-man analogy).
They know that more the market goes up, higher are the risks of a fall. So they act like the 10th man. They question the rationale behind the upmove. And if they find evidence to the contrary (like markets getting overvalued), they take the opposite stand (like short the stocks or sell out and increase their cash levels).
And more often than not, the results are profitable for such contrarian thinkers.
A case in point is the story depicted in another great movie The Big Short, which is based on the book The Big Short: Inside the Doomsday Machine.
Its about a hedge fund manager named Michael Burry – who acts as the ‘10th Man’ and recognizes that the U.S. housing market (in mid-2000s) was driven by an asset bubble inflated by high-risk loans. He shorts the US housing market much before the crash of 2007-08. Eventually, he ends up making billions of dollars with almost 500% returns on his short positions.
Coming back to ourselves.
Let us be honest.
We as investors always try to convince ourselves that we know things that are sufficient to evaluate any investment opportunity.
But fact is that most of the times, we over-estimate our abilities and under estimate the things we don’t know.
Result is that we tend to turn a blind eye to potential risks, knowingly or unknowingly. And this leads to losses.
Even if we were to talk about our personal finances, the story remains same.
I see so many people avoiding buying a large life (term) insurance cover.
“I am not going to die today. Why should I waste money on something that gives no returns?”
Then there are still more people who think that buying health insurance is a waste of money.
“I am fit and healthy – How can I end up in a hospital?”
Such ignorance works for most people most of the times. But if doesn’t, the cost is way too big.
How to be the 10th Man?
It is tough no doubt.
We seek patterns. We look for confirmations everywhere. So if we see 9 people agreeing to something, then its really tough to take the opposite stand and be the 10th man.
Problem is…. that we are not a combination of 10 men who can oppose and counter oppose each other. We are simple people. Infact, each one of us is just one person – with one brain. We don’t have 10 brain parts too where one part can take a stand against the rest nine.
So no doubt it is tough to take the opposite stand against what everyone else believes.
But I am not asking you to prove yourself or others wrong.
I am only asking you (and myself too) to seek out viewpoints that oppose what crowd agrees too. Before accepting something as fact or norm, put yourself in the shoes of the 10th man and think. Think hard.
Mark Twain said,
When you find yourself on the side of the majority, you should pause and reflect.
It is not easy. But it is necessary. And it will help us protect us from unwanted surprises. When everybody is thinking outside the box, you should look inside the box.
Think about it.
Thanks for the article.
The problem for the 10th man is when things are looking good and everyone is enjoying the bubbly he will look like a douchebag and will be laughed out of the room (e.g. Bernanke dismissed a guy, in his team probably, suggesting that if home prices head down it will be big trouble, by saying it has never happened country wide, Rajan when he took on Greenspan on low interest rate in some meeting etc.)
Agree with you KPL
It is not easy. 😐
Nice Article Dev …
Loved the article and in a way its timing! Now that everyone in India 10/10 people are convinced that India’s “surgical strike” has achieved what it intended to.
I will contradict myself here and take back to financial markets and say such instances are slowly becoming rare with more n more noise from outside the box thinkers – it has to again swing to a time where all the thinkers move outside the box for the 10th man rule to apply – in a way.
And interesting thoughts…
As you have rightly pointed out, thinking out of the box and contrarian thinking helps. It’s something like the famous Warren Buffet quote – “Be greed when others are fearful and fearful when others are greedy”.