In general mosaic is the art of creating images with an assemblage of small pieces of colored glass, stone, or other materials. It is a technique of decorative art or interior decoration.
In Finance world, the mosaic theory refers to a research approach where by the analyst arrives at a conclusion by piercing together bits of publicly available information. The mosaic theory is the method of analysis used by security analysts to gather information about a corporation. Mosaic theory involves collecting public, non-public and non-material information about a company in order to determine the underlying value of the company’s securities and to enable the analyst to make recommendations to clients based on that information.
Some see this style of analysis as a misuse of insider information, but the CFA Institute has recognized mosaic theory as a valid method of analysis. However, analysts using this method should disclose the details of the information and methodology the used to arrive at their recommendation.
HOW IT WORKS?
For example let us assume that a research Analyst named PQR is working in a company XYZ. As a part of his daily duty he goes through the companies 10K and 10Q reports, as well as published media reports and published reports from other analysts. Based on this information he realized that the company in which he is researching is going to make a tender offer for another company. The Company did not disclose this information, and none of the other analysts have realized what’s going on. He is the first and he came to that conclusion the same way an artist assembles tiny tiles to make a picture.
This Knowledge of an imminent tender offer that has not been disclosed yet is considered material, non-public information- insider information. However, because John did not obtain this information from insiders he would not be doing anything illegal if he were to trade the shares of company XYZ based on the merger Information.