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Mosaic Theory for Stock Picks (Part 1)

14 December 2007 - Features - Editor

Labels can be misleading. The Mosaic Theory, for example, raises specters of bureaucrats and stock analysts putting discrete information together, in order to discern important trends. The matter has been mixed with notions of withholding information from the public, and of presenting unsupported conclusions as well. All this is a pity because the Mosaic Theory can also be another term for Environment Scanning, a process which is integral to Strategic Planning. There is certainly nothing illegal about using the Mosaic Theory, whether under this name or another label, to make top stock picks for your own portfolio!

Not everything about company stocks happens exactly at the end of quarters. There could be extremely significant developments that will eventually affect stock price that executives have no occasion to announce or to explain immediately on occurrence. Batches of a product may fail. Market share may be lost due to a stock-out. Trade unions may decide on disruptive action. Competitors may talk of merging. Investors, especially small ones, will know about these events well after the first stirrings. However, the clever investor can sense straws in the wind long before a storm. This is how the Mosaic Theory can deliver value on a stock market floor.

Generic Pieces of the Stock Price Puzzle

There are a large number of innocuous pieces of information that we come across in our daily lives, which may have values as hints of how stocks will fare in the future. Some of these are external to the immediate environment in which an individual company functions, while others may occur deep inside shop floors, or even at distant locations. Rising inflation tends to reduce spending on goods and services that depend on disposable incomes. Depreciation of a home currency can drive an import-based business on to the street, while the reverse is true of exporters in an economy that uses appreciating currency. Patients may display adverse side-effects to new drugs in clinical trials, throwing a pharmaceutical company’s stocks in to later disarray. You and I routinely switch brands because we are unhappy with price increases. The Internet has changed the way Presidential campaigns are run, and the effects of this on some business sectors are unknown as yet.

Events within a company may be even more difficult for investors to detect than market place changes. Most of these involve people, including changes and separations at all levels of hierarchy. There are long gaps between actual employee turnover, and individual decisions to leave. Only a handful of professionals continue to perform diligently even after they have decided to leave a company. Blue collar workers make very gradual changes to sap productivity, and disruptive action is like a volcano, simmering indefinitely before final eruption.

Mosaic Theory for Stock Picks (Part 2)

 


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