What Is the Mosaic Theory?

The mosaic theory refers to a method of analysis used by security analysts to gather information about a corporatio💎n. The mosaic theory involves collecting publi൲c, non-public, and non-material information about a company to determine the underlying value of its securities and to enable the analyst to make recommendations to clients based on that information.

How the Mosaic Theory Works

There is an ongoing debate within the investment community as to whether this style of analysis misuses insider information, but the CFA Institute, formerly known as the Association for Investment Management and Research (AIMR), has recogni🔜zed mosaic theory as a valid method of analysis.

Hedge fund manager Ra🔜j Rajaratnam used the mosaic theory as his defense during his insider trading trial in 2011 but was ultimately found guilty.

Mosaic Theory vs. Scuttlebutt Method

Mosaic theory closely aligns with the scuttlebutt method, a company analysis technique popularized by investment guru Philip Fisher in hi༒s 1958 book “Common Stocks and Uncommon Profi⛦ts."

Investors who use the scuttlebutt method make conclusions about a company by piecing information together using firsthand knowledge from discussions with employees, competitors and industry experts. Both the mosaic theor📖y and the scuttlebutt method gather smal🐎l pieces of non-material information and add them together to form a material conclusion.

Special Considerations

Easier access to information makes the mosaic theory more accessible to do-it-yourself (DIY) investors. Non-material information might be collected in the following waysℱ.

10-K Reports

Investors who have a proficient understanding of accounting concepts, such as profit and loss statements🗹 and balance sheets, can scour the ꦬcompany’s financial performance for anomalies. You can access 10-K reports on the Securities and Exchange Commission’s (SEC) website.

LinkedIn and Glassdoor

These websites provide us♛eful insight into a company’s employees from customer service represen🌄tatives to senior management. Investors might be able to make conclusions about the labor turnover rate and level of employee satisfaction by reviewing user profiles and posted content.

Google Trends

Determine if there is robust consumer demand for a company’s products and services by using this Google research tool. For example, an investor 💙may conclude that a company is likely to receive a takeover bid from a multinational corporation due to strong demand for a new product it sells in a foreign market.

The Pew Research Center

This site provides investors with nonp𝓰artisan macro insights about current trends, attitudes, and issues that are shaping the world. For instance, Investors might learn that a company is majorly out of alignment with public sentiment♕ about a particular issue, which may severely impact its revenue.