======mosaic_theory======
The Mosaic Theory is a cornerstone concept for diligent analysts, describing the legal and ethical practice of combining numerous pieces of public information and non-material, non-public information to form a significant conclusion about a company's value. Think of it like assembling a mosaic: each individual tile (a piece of data) is insignificant on its own. However, a skilled artist (the investor) can arrange these tiny, unremarkable pieces to create a valuable and insightful picture (a complete [[investment thesis]]). This final picture might be a //material conclusion//—that is, a conclusion that would likely influence an investment decision. The theory provides a crucial defense against accusations of [[insider trading]], as the analyst’s edge comes not from a single illegal tip, but from the skillful assembly of many small, legal pieces of information. It's the ultimate reward for shoe-leather research and a fundamental tenet of deep-dive [[value investing]].
===== The Legal Tightrope =====
The mosaic theory exists in the space between diligent research and illegal activity. To understand it, you must first grasp two critical distinctions that securities regulators, like the U.S. [[SEC]], use to define insider trading.
==== Material vs. Non-Material Information ====
**Material** information is any data that a reasonable investor would likely consider important in making a decision to buy, sell, or hold a security. It's "market-moving" information.
  * **Examples of Material Information:** A pending merger, upcoming earnings results that are far from expectations, a major product failure, or a significant change in management.
**Non-Material** information is data that, on its own, is not significant enough to move the stock price.
  * **Examples of Non-Material Information:** The fact that a factory manager seems particularly optimistic, a slight increase in foot traffic at a single store, or the CEO's personal travel plans.
==== Public vs. Non-Public Information ====
**Public** information has been broadly disseminated to the investing public and is readily available. Think of company press releases, official SEC filings (like a [[10-K]] or [[10-Q]]), and major news articles.
**Non-Public** information has not been released to the public. This is where it gets tricky. It could be a private conversation with a company executive or an internal sales report you happen to see.
The cardinal rule of investing is this: **It is illegal to trade based on //material non-public information//.** The mosaic theory allows you to take //non-material non-public information// and combine it with other public and non-material data points. The final conclusion might be material, but the individual inputs are not.
===== Building Your Own Mosaic =====
For the individual investor, the mosaic theory is not just a legal concept; it's a practical roadmap for gaining an analytical edge. It's the art of being a financial detective.
==== The Art of Scuttlebutt ====
Legendary investor [[Philip Fisher]] was a master of the mosaic theory, though he called his method [[scuttlebutt]]. This involves going beyond financial statements and talking to a wide network of people connected to a company—customers, suppliers, competitors, and even former employees. Each conversation might only yield a tiny, non-material crumb of information. But when you collect enough crumbs, you can bake a loaf of bread.
==== Putting the Pieces Together: A Hypothetical Example ====
Imagine you're researching a fictional company, "GadgetCo," which makes a popular smartphone accessory. Your research process might look like this:
  * **Piece 1 (Public):** You read in GadgetCo's latest quarterly report that their gross margins have slightly decreased, which they attribute to "competitive pressures."
  * **Piece 2 (Public):** A tech blog publishes an article about a new, cheaper competing product from a rival.
  * **Piece 3 (Non-Material, Non-Public):** You talk to a salesperson at a major electronics retailer who mentions they've been instructed to push the rival's product over GadgetCo's.
  * **Piece 4 (Non-Material, Non-Public):** You visit a few stores and notice that GadgetCo's product is often on the clearance shelf.
  * **Piece 5 (Public):** You check shipping data (a form of alternative data) and see that shipments from GadgetCo's key supplier in Asia have dipped by 5% in the last month.
None of these pieces on its own is a smoking gun. But when you assemble your mosaic, the picture becomes clear: GadgetCo is losing market share, facing pricing pressure, and is likely heading for a poor earnings report. This //material conclusion// was reached legally through diligent research.
===== A Word of Caution =====
While the mosaic theory protects diligent research, the line between a brilliant mosaic and an illegal tip can be blurry. The key is the //synthesis//. Your edge must come from your work connecting the dots, not from a single dot being a "silver bullet."
If a company insider, like a CFO, "accidentally" tells you in a private conversation, "Our earnings next week are going to be terrible," this is not a piece of your mosaic. That is classic //material non-public information//. Acting on it would be insider trading, period. In fact, under rules like [[Regulation FD]] (Fair Disclosure), that CFO has likely broken the law by selectively disclosing that information to you.
Always ask yourself: Is this insight the result of my own intellectual labor in connecting many small pieces, or was I just handed a big, secret one? The spirit of the mosaic theory is to reward the detective, not the person who was slipped the answer key.