What Is the Mosaic Theory?
Let me explain the mosaic theory directly: it's a method I and other security analysts use to gather information about a corporation. You see, it involves collecting public, non-public, and non-material details about a company to figure out the true value of its securities. From there, I can make solid recommendations to clients based on that compiled information.
Key Takeaways
Understand this: the mosaic theory is essentially a style of financial research where you, as an analyst, pull from various resources to value a company, stock, or other security. It requires gathering public, non-public, and non-material information about the company. You then use this broad range of data to determine the stock's value and decide if it's worth recommending to clients.
How the Mosaic Theory Works
There's an ongoing debate in the investment world about whether this analysis style misuses insider information, but know that the CFA Institute—previously called the Association for Investment Management and Research (AIMR)—recognizes mosaic theory as a valid approach. Take hedge fund manager Raj Rajaratnam, who tried using mosaic theory as his defense in his 2011 insider trading trial, but he was still found guilty.
Here's something important: if you're an analyst using mosaic theory, you should disclose to clients the details of the information and methodology that led to your recommendation. This practice boosts transparency and helps you avoid accusations of mishandling inside information.
Mosaic Theory vs. Scuttlebutt Method
Mosaic theory lines up closely with the scuttlebutt method, which is a company analysis technique made famous by investment expert Philip Fisher in his 1958 book 'Common Stocks and Uncommon Profits.' If you use the scuttlebutt method, you're drawing conclusions about a company by piecing together firsthand knowledge from talks with employees, competitors, and industry experts. Both approaches involve collecting small bits of non-material information and combining them to form a significant conclusion.
Special Considerations
With easier access to information today, mosaic theory is more within reach for do-it-yourself investors like you. You can collect non-material information through several channels.
Ways to Collect Non-Material Information
- 10-K Reports: If you have a good grasp of accounting concepts like profit and loss statements and balance sheets, you can examine a company’s financial performance for anomalies. Access these reports on the Securities and Exchange Commission’s (SEC) website.
- LinkedIn and Glassdoor: These sites offer insights into a company’s employees, from customer service reps to senior management. You might draw conclusions about labor turnover and employee satisfaction by reviewing profiles and posted content.
- Google Trends: Use this tool to check for strong consumer demand for a company’s products and services. For instance, you could conclude that a company might get a takeover bid from a multinational due to high demand for a new product in a foreign market.
- The Pew Research Center: This provides nonpartisan macro insights on trends, attitudes, and issues shaping the world. For example, you might learn that a company is out of step with public sentiment on an issue, which could hurt its revenue.
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