Mosaic Theory - Explained
What is the Mosaic Theory?
Written by Jason Gordon
Updated at April 17th, 2022
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Table of Contents
What is the Mosaic Theory?How Does the Mosaic Theory Work?Mosaic Theory and Scuttlebutt MethodMosaic Theory Practical ApplicationWhat is the Mosaic Theory?
Security analysts in the finance world use the mosaic theory. The mosaic theory is an approach where analysts piece together information to arrive at a conclusion concerning a company. The Mosaic theory is used to measure the economic stability of the company. The analysts make use of material, non-material, public and non-public to draw out the conclusion.
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How Does the Mosaic Theory Work?
For the information gathered not to be considered illegal, it must conform to the rules of confidentiality of the company. The mosaic theory analysis method is recognized by the CFA institute as legal. The mosaic theory is based on the transparency of companies relating to their profitability. There is a slight difference between insider trading and the mosaic theory. Raj Rajaratnam, founder of Galleon Group, and some of his colleagues were found guilty of insider trading even though his lawyers used the mosaic theory as a defense. The difference between mosaic theory and insider trading may be based on the sources of information gathered. As much as possible, the analysts should avoid the illegal use of the material and non-public information.
Mosaic Theory and Scuttlebutt Method
The Scuttlebutt Method was popularized by Philip Fisher in his book titled -Common Stocks and Uncommon Profits' '. The method refers to the gathering of information by talking to the general public, like the customers, employees, competitors, experts or vendors. The scuttlebutt method can be used by semi-expert or people who cannot afford professional services. Both names can be used interchangeably since they both piece together non-material information though the mosaic theory is more formal.
Mosaic Theory Practical Application
Sources from which non-material information can be gathered:
- The Pew Research Center: provides information on social and economic trends.
- Company's Financial Report, for example, 10-K, and 10-Q: this is an annual summary report required by the US Securities and Exchange Commission to be filed by a company on its financial performance. This can be for searched to make investment decisions since it contains a wealth of information
- Financial Analysts and Experts Report
- Social Networks: like Google trends, LinkedIn, Facebook and Glassdoor
- Company's former and present employees views.