The Other Analyst Scam

Tech investors like me have a problem. We like to value markets. And we like to believe that if "market A" grows to "X size" by "Y period," we're basing our speculative bets on sound math. Here's an example featuring former Motley Fool Rule Breakers pick XM Satellite Radio (Nasdaq: XMSR  ) . Go ahead, read it. I'll wait.

See how it works? David Gardner practices this method because, too often, classic valuation metrics such as the P/E won't work when it comes to finding the best tech stocks. That leaves investors with two choices: Ignore tech altogether, or study metrics that others ignore in a quest to value the invaluable.

As a contributor to Rule Breakers, I strongly urge you to lean toward the latter. But, thanks to an incisive article by Ashlee Vance at The Register (a must-read for techies), I should warn you of a key problem with investing this way: Industry analyst estimates may be no better than the dreck Wall Street produces.

Here's the problem: Though IDC, Forrester (Nasdaq: FORR  ) , Gartner (NYSE: IT  ) , and similar firms tend to study technology trends -- a highly useful practice for IT managers and chief information officers -- much of their revenue comes from long-term contracts with the vendors upon which they report. That wouldn't be a conflict of interest if these reports weren't marketed to the media as independent research.

But they are, which strikes me as bogus. About 12 years ago, while still employed as a PR consultant, I was in a meeting at a Boston-based firm when my client asked the analyst we were talking with whether she'd speak to the media on his behalf. Her response? "Sure, I know how the game works."

In other words: I'll help you out if there's a chance you'll buy my firm's research and consulting services. Wall Street's miscreants had nothing on this pay-for-play sham.

Maybe the game has since changed. I'd certainly love to believe that. But even Forrester, which I consider to be a reputable firm, has refused to disclose its vendor relationships each time I've asked. That's hardly fair, especially if analysts expect us to believe that they've produced a report that speaks to what investors and reporters need to know, rather than what its clients want us to hear.

So be careful, tech titans. When it comes to the business of projecting the future, industry analysts may not be what they seem.

How great is growth? Three of the dozens of stocks in the market-beating Motley Fool Rule Breakers portfolio have quadrupled in two years. Care to find out what they are?Click hereto get 30 days of free access to the service.

Fool contributorTim Beyers, ranked 568 out of 17,477 inMotley Fool CAPS, still thinks tech is a relative bargain -- with or without credible analyst data. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. Get the skinny on all of the stocks in his portfolio by checking Tim's Foolprofile. The Motley Fool'sdisclosure policynever plays games.


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