Pre-Mortem Analysis

A Pre-Mortem Analysis is a powerful thought experiment and Risk Management tool where you imagine that a plan or investment has already failed spectacularly. From that future vantage point, you work backward to uncover all the potential reasons for its demise. Developed by psychologist Gary Klein, this technique is the polar opposite of a traditional Post-Mortem Analysis, which dissects failures only after they’ve happened and the money is already lost. By prospectively “killing” your investment idea on paper, you can surface hidden risks, challenge flawed assumptions, and battle the dangerous Cognitive Bias of overconfidence. For investors, it’s a disciplined way to stress-test an investment thesis before committing capital. Instead of asking, “How could this succeed?” you force yourself and your team to ask the more critical question: “We failed. What went wrong?”

Let’s be honest: when we fall in love with an investment idea, our brains can betray us. We get excited about the potential upside and start looking for evidence that confirms our brilliant thesis—a classic case of Confirmation Bias. A pre-mortem acts as a circuit breaker for this kind of wishful thinking. It systematically injects critical and creative thinking into the Due Diligence process. It’s particularly effective at dismantling Groupthink, a phenomenon where a group's desire for harmony or conformity leads to irrational decision-making. By making the failure a hypothetical certainty, it gives everyone “permission” to voice concerns without sounding like a pessimist or a “team-wrecker.” The goal isn't to kill every idea but to make good ideas even stronger. By identifying potential points of failure ahead of time, you can often adjust your plan to mitigate them, thereby strengthening your investment and building a more robust Margin of Safety.

A pre-mortem is surprisingly simple to run, whether you're a solo investor at your kitchen table or part of an investment committee. Just follow these steps:

State your investment thesis clearly. For example, “We are investing in Company X because we believe its new product will capture 20% of the market within three years.” Make sure everyone involved understands the plan for success.

Now, for the fun part. Announce to the group (or yourself): “Imagine it’s three years from now. The investment in Company X has been a total disaster. We’ve lost most of our capital. The plan has completely failed.” It is crucial that you frame the failure as a definitive fact, not a possibility.

Take 5-10 minutes for everyone to independently and silently write down every reason they can think of for why the failure occurred. Encourage creativity. Did a key executive leave? Was the product a flop? Did a competitor release a superior product? Did a change in regulations crush the business model? No idea is too outlandish at this stage.

Go around the room and ask each person to share one reason from their list. Continue this process until all unique reasons have been shared and recorded on a whiteboard or document for everyone to see. During this phase, there should be no debate or criticism—just a collection of potential failure points.

With the full list of potential disasters in front of you, now you can analyze them. Are there any risks you hadn't considered? Can you take steps to mitigate the most probable or damaging ones? This process might lead you to modify your investment thesis, add new monitoring checkpoints, or, in some cases, conclude that the risks are simply too great and walk away.

The pre-mortem is a natural fit for the Value Investing philosophy. At its core, value investing is about buying great companies at a discount to their intrinsic value, and a huge part of that process is a deep, almost obsessive focus on the downside. The first rule of investing, as famously stated by Warren Buffett, is “Never lose money.” The second rule is “Never forget rule No. 1.” A pre-mortem is a practical application of this principle. It forces you to look for what could go wrong before you even think about what could go right. It complements other techniques like Scenario Analysis but adds a unique psychological twist that uncovers risks that a simple spreadsheet might miss. By systematically identifying the landmines hidden in an investment's path, you can better assess whether your Margin of Safety is truly sufficient. In the end, it’s far better to see your idea die in a 30-minute meeting than to watch it die a slow and painful death in your portfolio.