Mosaic Theory, Security Analysis and Resourcefulness

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Ever heard of the Mosaic Theory? Of the many theories abound in finance, the Mosaic Theory is one that is rarely mentioned. Yet, we believe that its importance to security analysis cannot be understated. Today, we pay homage to the underrated Mosaic Theory.

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What is the Mosaic Theory?

In its true form, the theory is used as a legal defence against insider trading. Under insider trading laws, an analyst or investor must not act on material, non-public information in any way. However, under the Mosaic Theory, an analyst or investor may use conclusions derived from public and non-material, non-public information as a basis of investment decisions and recommendations, even if those conclusions would have been material inside information had they been communicated to the analyst or investor by the company directly. In 2011, Galleon Group's Raj Rajaratnam attempted to defend himself against charges of insider trading by arguing that his trades were based on the Mosaic Theory.

Mosaic Theory and Security Analysis

Our focus will not be on its legal applications – no, that will hardly do it justice. Rather, the Mosaic Theory recognises that a combination of non-material information might add up to material information. It is highly peculiar to me that in all the literature of financial statement analysis I've gone through, the only application of it mentioned was its legal application. Phillip Fischer did allude to theory as his scuttlebutt method of due diligence, but I believe there are differences. Fischer advocated conducting ground research by talking to customers, suppliers and competitors in order to gain an informational edge. The Mosaic Theory extends this by asserting that a combination of any information (both financial and non-financial) may result in an informational edge. Through that, I would argue that it highlights a quality that is often overlooked – resourcefulness.


Much time and text has been devoted to the technical aspects of investing; the formulas, definitions and what have you. These fundamentals are no doubt important, but security analysis is so much more than that simply because the technicalities of investing are as good as common knowledge to all semi-serious investors. Investors look for insights which the market does not possess, and there is usually little insight to be obtained from looking at financial metrics. Security analysis, in my view, is about piecing seemingly unrelated and unimportant information together to form a watertight conclusion. It is about knowing what data to look for and where to look for it. In practice, the availability of data is often the limitation in applying financial formulas. When Google fails – as it often does with company-specific data – derivations and proxies are required.

At the heart of these lie the Mosaic Theory and the quality of resourcefulness. Alas, it is not something that can be taught directly, which is perhaps why almost no literature gives it any attention. Nevertheless, we believe it is an idea worth putting out there. Perhaps, by simply being aware of the idea, it will assist in the development of one's analysis lest one becomes entrapped in the routine of starring at ratios. Perhaps, this is what distinguishes the not-so-good investors from the truly great ones.

If there is a theory that best encapsulates the art of security analysis, the Mosaic Theory gets my nomination.

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