Stock Market · Mind over Markets

Pre-mortem

A pre-mortem is the technique of imagining a future failure BEFORE making a decision, then working backward to identify what could cause it. It's the most underused tool in retail investing, and one of the most powerful.

The technique

Before making any major investment decision:

1. Imagine it's 2 years from now and the investment has FAILED catastrophically

2. Vividly visualise the outcome (down 60%, capital lost, etc.)

3. Write down 5-10 specific reasons WHY it failed

4. Check: are any of these reasons risks you can mitigate now? Or accept consciously?

Why it works

Standard analysis is forward-looking and optimistic. 'why will this succeed?' Pre-mortem flips this to 'why might this fail?' The brain is more creative when imagining concrete failure than abstract risk.

> The pre-mortem turns implicit risks into explicit risks. Once you've named them, you can plan for them.

Indian investing example

Decision: Buy Indian PSU bank stock at ₹100.

Pre-mortem (2 years later, stock is at ₹40):

1. RBI mandated higher provisioning, eroding earnings

2. New NPA wave from corporate book

3. Government recapitalisation diluted existing shareholders

4. Lost market share to private banks

5. Management changed mid-thesis, strategy pivoted

6. Macro slowdown reduced credit growth

After this list, you can decide:

• Which risks are you willing to accept?
• Which risks can you monitor and exit on?
• Which risks are dealbreakers?

If 4-5 of these risks feel realistic and significant, the investment may not be worth taking.

Pre-mortem for entire portfolios

Once a year, do a portfolio-level pre-mortem:

'Imagine my portfolio is down 60% in 2 years. What 5 scenarios would have caused that?'

Common answers:

• Equity market crash (35%+ correction)
• High concentration in one sector that crashed
• Specific stocks in portfolio facing company-specific issues
• Macro shock (rate spike, currency collapse, geopolitical event)

If your portfolio is highly concentrated in one of these scenarios, diversify before the crash forces you to.

Pre-mortem vs post-mortem

Post-mortem (after failure): 'Why did this fail?' Useful for learning, but the loss is already real.

Pre-mortem (before commitment): 'Why might this fail?' Allows you to avoid the loss.

Both are valuable, but pre-mortem is more efficient. You catch issues before paying for them.

The behavioural trick

Pre-mortems work because they bypass two biases:

1. Optimism bias: standard analysis tilts positive; pre-mortem forces negative thinking

2. Confirmation bias: standard analysis seeks supporting evidence; pre-mortem seeks failure modes

It's a structural defense against your own brain.

Takeaway. Pre-mortem: imagine a future failure BEFORE deciding. Visualise the loss, list specific causes, identify which risks you can mitigate vs accept. Bypasses optimism and confirmation biases. Most underused decision tool for retail investors.