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.

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 ......