By the time you have finished researching an investment, you believe in it. That is the problem — the research was conducted by someone who grew steadily more convinced, and the final review is conducted by that same convinced person.
The pre-mortem
This works because of prospective hindsight — a well-replicated finding that imagining an event as already certain produces substantially more, and more specific, reasons than asking about possibilities. "What might go wrong" invites reassurance. "It failed; explain it" demands a mechanism.
"Have I forgotten anything?" produces a glance at the bag and a yes. "I have arrived and something important is missing — what is it?" produces the charger, the medicines, the adapter. Same bag, same person, minutes apart.
That is the entire technique. Assuming the failure has occurred gives your mind a fixed outcome to explain rather than an open question to dismiss.
- 1Fix the failure
Write: "It is two years from now. This position is down 50% and I have sold." Not "might be" — state it as fact.
- 2List causes for ten minutes
Write every mechanism you can. Do not evaluate or filter while writing; volume first, judgement after.
- 3Sort by likelihood and severity
Most items will be improbable. Two or three usually stand out as genuinely plausible, and those are the real risks in the position.
- 4Convert each into something checkable
A risk you cannot monitor is a worry. "Receivable days rising above 90" is a risk you can check quarterly — that conversion is where the value is.
What a pre-mortem typically surfaces
| Category | Example the exercise tends to produce |
|---|---|
| Thesis risk | The margin recovery was structural, not cyclical — it is not coming back |
| Balance sheet risk | Refinancing failed when credit tightened |
| Governance risk | Promoter pledging increased and was liquidated |
| Competitive risk | A larger competitor entered and priced aggressively |
| Valuation risk | Earnings grew as expected, but the multiple halved |
| My own behaviour | I averaged down three times and made the position far too large |
Red teaming
The stronger version: build the best possible case against your position, as though you were being paid to short it. Not a token list of caveats — the argument you would genuinely find most difficult to answer.
- “Of course, competition could increase”
- Risks listed and immediately dismissed
- Each objection followed by “but”
- You feel more confident afterwards
- The strongest version of the bear case, stated fairly
- Specific numbers that would prove you wrong
- Objections left standing where you cannot answer them
- You feel less certain — and better calibrated
The pre-mortem you did not want to run
You have researched a stock for three weeks and are ready to buy a large position. A pre-mortem produces one uncomfortable item: the entire thesis depends on one customer that provides 40% of revenue, and that contract is up for renewal next year.
Why does a pre-mortem produce better risk identification than simply asking "what could go wrong"?
"Kuch bhool toh nahi raha?" — is sawaal pe dimaag kehta hai "nahi, sab theek hai". Par poocho "station pahunch ke pata chala ki ek zaroori cheez chhoot gayi — woh kya hogi?" — turant charger, dawai, ID yaad aa jaate hain. Nuksaan ko pehle se maan lo, tab wajah dikhti hai.
- Assume the investment has already failed, then explain how — the framing does the work.
- Convert each plausible cause into something specific you can monitor.
- Investor behaviour appears among the top causes more often than people expect.
- Red teaming means the strongest bear case stated fairly, not caveats followed by "but".
- Run it before buying — afterwards, you are defending a decision rather than testing one.
Mark it done to track your progress through the curriculum.
Common questions
Short, direct answers to what people ask about this topic.
- pre-mortem meaning in investing
- A pre-mortem assumes the investment has already failed and asks you to explain how it happened. You write “it is two years from now, this position is down 50% and I have sold” as a statement of fact, then list every mechanism that could have produced it for about ten minutes before judging any of them. Stating the failure as certain rather than possible is the whole of the technique.
- what is prospective hindsight
- Prospective hindsight is imagining an outcome as already certain in order to generate reasons for it, and it produces substantially more — and more specific — causes than asking what might go wrong. “What could go wrong?” invites reassurance, while “it failed, explain it” demands a mechanism. The same person, minutes apart, produces a markedly better list under the second framing, which is why a pre-mortem works.
- building the strongest possible case against your own position is called
- Red teaming. It means arguing the bear case as though you were being paid to short the stock: the strongest version stated fairly, the specific numbers that would prove you wrong, and objections left standing where you genuinely cannot answer them. A token devil’s advocate list, where every risk is followed by “but”, leaves you more confident rather than better calibrated.
- should a pre-mortem be done before or after buying
- Before — fifteen minutes ahead of the order is worth more than an hour afterwards. Once the position exists, every objection is processed by someone defending a decision they have already made, which is confirmation bias operating at full strength. Before the purchase, the same objections are simply information about sizing and about what to monitor.
- what do I do with the risks a pre-mortem finds
- Convert each plausible one into something you can actually check on a schedule. “The balance sheet worries me” is a worry; “receivable days rising above 90” is a risk you can verify every quarter from the filings. Sort by likelihood and severity first — most items will be improbable, and the two or three that stand out are the real risks, which normally informs position size rather than vetoing the idea.