Fundamental Analysis

mosaic theory

What is Mosaic Theory?

Mosaic theory refers to an analytical method used by security analysts to gather information about companies. Mosaic theory involves gathering public, non-public, and non-material information about a company to determine the potential value of its securities and to enable analysts to make recommendations to clients based on that information.

key takeaways

  • Mosaic theory is a style of financial research in which analysts use a variety of sources to determine the value of a company, stock, or other security.
  • Mosaic theory requires analysts to collect public, non-public, and non-material information about a company.
  • This extensive information is used to help analysts determine a company’s stock value and whether the stock should be recommended to clients.

How Mosaic Theory Works

Whether this type of analysis is an abuse of inside information has long been debated in the investment community, but the CFA Institute, formerly the Institute for Investment Management and Research (AIMR), has embraced the mosaic theory as a valid method of analysis.

Hedge fund manager Raj Rajaratnam used the mosaic theory as a defense in a 2011 insider trading trial, but was eventually found guilty.

Analysts using Mosaic Theory are expected to disclose details of the information and methods they use to arrive at their recommendations to clients; this protocol increases transparency and helps avoid allegations of misuse of inside information.

Mosaic theory and Scuttlebutt method

Mosaic theory is closely related to the scuttlebutt method, a corporate analysis technique popularized by investment guru Philip Fisher in his 1958 book Common Stocks and Uncommon Profits.

Investors using the scuttlebutt method draw conclusions about the company by piecing together information using first-hand knowledge from discussions with employees, competitors, and industry experts. Both the mosaic theory and the scuttlebutt method collect small pieces of immaterial information and add them together to form material conclusions.

special attention items

Easier access to information, making it easier for do-it-yourself (DIY) investors to understand mosaic theory. Insubstantial information can be collected in the following ways.

10-K report

Investors well-versed in accounting concepts such as income statements and balance sheets can look for anomalies in a company’s financial performance. You can access the 10-K report on the SEC website.

LinkedIn and Glassdoor

These sites provide useful insight into a company’s employees, from customer service representatives to senior executives. Investors can draw conclusions about labor turnover and employee satisfaction by looking at user profiles and posted content.

Google Trends

Use this Google research tool to determine whether consumer demand for a company’s products and services is strong. For example, investors may conclude that the company is likely to receive takeover offers from multinational corporations due to strong demand for its new products sold in foreign markets.

Pew Research Center

The site provides investors with nonpartisan macro insights on current trends, attitudes and issues shaping the world. For example, investors may learn that a company is largely at odds with public perception on a particular issue, which could significantly affect its revenue.

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