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on 938LIVE,

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How to Retain Clients

By TAN Kee Wee

(MediaCorp 938LIVE’s Money Talks, Thursday, 3 September 2009, 7.50 am and 7.20 pm)

A few years before the credit crunch struck in September 2008, Professor Nouriel Roubini, the New York University economist, was issuing warnings that such a catastrophe would happen.

For a long time, he was ignored. But when his warnings materialized after Lehman Brothers collapsed, he was labeled a sage and became a key figure in the international media circuit.

Unfortunately, his predictions have not been spot on lately. In March this year, when global stock markets hit bottom, Roubini said that the S&P 500 Index, which was then around 670 points, might drop below 600 points.

Instead of falling, the S&P 500 has since risen more than 50 percent to its current level of around 1,000 points. This goes to show that when economists try to give short-term price forecasts, they are walking on thin ice.

Very few economists get it right most of the time. More often than not, we get it wrong most of the time.

Ideally, economists should just try to educate and explain. If part of the explanation involves a probability that an event might occur, it is perfectly alright to highlight the event.

Of course, the reality is that economists are asked for price forecasts all the time. Me too. If I knew the answers, I would gladly pass them on. But I don’t. I suppose I could if I have God’s mobile number. But too bad. God does not know me.

Since accurate forecasting is impossible, it’s astonishing that a whole forecasting industry has been build up, even enlisting the skills of feng shui masters, in the investment community.

What is worse, some of these forecasters are fearless. They claim that they are always right. The truth is, on closer inspection, they always present their forecasts in contradictory terms.

For instance, a typical forecast goes like this: “prices are going up but there are downside risks”. In plain English, it means that prices are going up but they can also come down. This doesn’t tell us very much.

If you think that the forecaster is contradicting himself, you are right. It is actually a deliberate move. Because once such contradictory statements are given, it does not matter whether the market goes up or down. He will always be right.

What can we learn from these savvy forecasters? First of all, you must not have the integrity of a boy scout. If you are in the business of taking a commission from selling an investment product, and your livelihood depends on having a pool of clients, this is what you could do.

Tell half of your clients to sell because the market is going down. Then tell the other half to buy because the market is going up. Let’s assume that the market goes up. The first group of clients, whom you told to sell, would be mad at you for giving the wrong advice. They would leave you as a result.

But the other half of your clients, whom you told to buy, would have made money. They will see you as a sage. So impressed will they be with you that they will introduce you new clients.

At the end of the day, you still have a client base and you are still in business. The downside is, you will soon be known as a person who constantly flips his views, tossing from side to side, like the roti prata man.

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