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What Is the Mosaic Theory?
The mosaic theory refers to a method of analysis used by security analysts to gather information about a corporation. The mosaic theory involves collecting public, 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.
Key Takeaways
- The mosaic theory is a style of financial research in which the analyst uses a variety of resources to determine the value of a company, stock or other security.
- The mosaic theory necessitates that the analyst gathers public, non-public, and non-material information about a company.
- This wide range of information is used to help the analyst determine the company's stock value and whether the stock should be recommended to clients.
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 recognized mosaic theory as a valid method of analysis. Hedge fund manager Raj Rajaratnam used the mosaic theory as his defense during his insider trading trial in 2011 but was ultimately found guilty.Analysts using mosaic theory should disclose to clients the details of the information and methodology they used to arrive at their recommendation; this protocol increases transparency and helps avoid accusations of misuse of inside information.
Mosaic Theory vs. Scuttlebutt Method
Mosaic theory closely aligns with the scuttlebutt method, a company analysis technique popularized by investment guru Philip Fisher in his 1958 book “Common Stocks and Uncommon Profits."
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 theory and the scuttlebutt method gather small pieces of non-material information and add them together to form a material conclusion.