Mosaic theory (investments)
The Mosaic theory in finance is a method used in security analysis to analyze information about a corporation.
Under insider trading laws, analysts may not use material non-public information to help select their trades. But traders might be able to piece together non-material non-public information and material public information into a mosaic, which may increase in value when properly compiled and documented. The theory is also referred to more colloquially as the scuttlebutt method by Philip Fisher in Common Stocks and Uncommon Profits.
Mosaic theory involves collecting information from different sources, public and private, to calculate the value of security. Applying the mosaic theory is as much art as it is science. An analyst gleans as many pieces of information as possible, determines if they tell a story that makes sense, and decides whether to recommend a trade. During the high-profile trial of investor Raj Rajaratnam, defense attorneys used the mosaic theory to argue against allegations of insider trading. These arguments were ultimately unsuccessful and Rajaratnam was convicted and sentenced to serve eleven years in prison.
It is also a legal theory used to uphold the classification of information, holding that a collection of unclassified information might add up into a classified whole. The theory has also been applied to legal reasoning in the context of the Fourth Amendment where the continuous use of GPS surveillance was found to violate the subject's "reasonable expectation of privacy".
- Insider trading
- Stock valuation
- Classified information
- Classified information in the United States
- Fourth Amendment to the United States Constitution
- Freedom of Information Act (United States)
- "Mosaic Theory". Investopedia.com. Retrieved 7 December 2009.
- https://dealbook.nytimes.com/2011/04/11/why-is-insider-trading-wrong/ "Why Insider Trading is Wrong"], "The New York Times", Peter J. Henning, 11 April 2011.
- "Washington Post series: How many security secrets did it spill?", The Christian Science Monitor, Peter Grier, 21 July 2010.
- "The Mosaic Theory, National Security, and the Freedom of Information Act", 115 The Yale Law Journal 628, David E. Pozen, 2005.
- "GPS Tracking and a ‘Mosaic Theory’ of Government Searches", "The Cato Institute", Julian Sanchez, 11 August 2010.
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