Using Mosaic Theory to Make Market Predictions

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It is quite common for people to believe the misconception that professional investors have more information when it comes to making market predictions than the everyday citizen. The truth is that the general public has just as much access to information in terms of earnings and statistics. We all can try and predict where companies are heading thanks to something called the mosaic theory.

While nothing is ever guaranteed, this article is going to discuss how you can use certain information to try and piece investment puzzles together on your own. Read along, take notes, and get ready to improve as an individual investor.

Analyzing Margins

The first thing you should do when trying to predict the future of a company is to look closely at operating margins and gross earnings. By looking at quarterly earnings, you can take note of any trends and analyze any discussions that the company’s management has had in terms of profit margins.

When looking at a current quarter ask yourself questions such as: Is the competition pushing or discussing price competition? Or are there any big discounts being marketed by the company?
This can help you determine if profit may be on the decline or if things are going just as expected. It is more than difficult to determine exact numbers when it comes to predictions, but by examining previous and current trends, you can get a feel for how high or low earnings could go.

Watch for Future Problems

There are several signs that could hint at future problems for a company. Is management discussing entering a new business or exiting from a certain market? Does the company have an excess of inventory that they can’t sell?

If one of these announcements is made, then the company will usually supply information in terms of profit changes that may occur.

Search for New Products

Any announcement from management in terms of a new product will usually precede a prediction in terms of sales and estimated start dates. While not all new products lead to an increase in profit, a launch is usually a sign that things are on the up and up and that can drastically affect a company’s bottom line.

Just be sure that you never stick to the same model and try your best to keep tinkering with your investment models as predictions and companies do change over time.

Focusing on the Competition

A common mistake for investors is focusing solely on the company they are investing in as if there is no competition in the market. Investors should always consider what could happen if another company leaves or enters the market. Just because you are investing in a company that has the market cornered for a product or service, does not mean that someone else will not come along with a better option and alter profits for the worse.

There are several models and statistics used to determine the impact of new competition in the marketplace, but that is often beyond the reach of many individual investors. However, you do have the ability to pay attention to new products and consider how it will affect a company’s end of year profit margins.

Is Company Saving Money?

It is wise to focus on how much a certain company may be doing to try and save money. If they are shutting down some production or laying off workers, then extra costs could take a big chunk out of quarterly earnings. However, also keep in mind that these decisions could lead to long term savings that will benefit you and the company further down the road.

Professional analysts ask all of these questions and use the mosaic theory to determine market predictions for certain companies. If you are willing to put in the work and do some of the research on your own, you may be able to benefit just as much as they do and take advantage of trends, and changes, in the same manner, that they have used to become successful.