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Things I Did Not Know About The CFA Exam

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Attentive readers may recall that a while back I signed up to take the CFA Level I exam, in order to (1) pursue my passion for standardized testing,(2) expose the secret behind-the-scenes workings of America’s trillion-dollar financial-analysis-certification business, and (3) have a major institution to stand behind my guarantees of consistent above-market investment returns. I wrote a post about it, and then mostly forgot all about it.

Thinking that the exam might be sometime in December, I looked into it a bit more this weekend. Here are some things that I learned that I didn’t previously know, though you might have:

1. The exam is given using pencil and paper at the Javits Center. I had vague visions of the anonymous computer lab where you take the Series 7 on computers from the mid-1980s. Now I have to go buy pencils.

2. All of its contents. Actually I’d read maybe 100 pages of the ethics reading but then I got bored and stopped.

3. It’s this Saturday. Oops!

So I spent this weekend learning ethics, quantitative methods, economics, financial reporting, and derivatives. I’ve got corporate finance, portfolio management, equities and fixed income to go. I like my chances.

A few questions for those who have preceded me through this vale of tears/HP-12Cs:
-Any last-minute study tips?
-Any good mnemonics?
-Any recommendations for bars near the Javits Center? Apparently there’s two hours to kill in the middle of the day and I’m thinking it may help to take the edge off a little.

My favorite part of the reading so far – though I have high hopes for ”Basics of Portfolio Planning and Construction” – was “Technical Analysis,” which somehow gets folded into “Quantitative Methods,” but which is full of non-quantitative claims like “these patterns can be spotted only by human artists looking at charts with their hearts’ minds’ eyes, and are never under any circumstances visible to computers or susceptible to statistical analysis” or “yes, if you bought when this technical indicator said to buy you would have lost all your money, but the trick is to combine it with other technical indicators, like trends, or something.”* Seriously: the authors chose examples to illustrate the benefits of technical analysis, and the analysis that they’re recommending for those examples works with about a 50% probability. Presumably the section on “coin flip analysis” was reserved for Level II.**

That’s maybe too harsh – while I’ve always assumed that technical analysis is mostly astrology, there is some behavioral-theoretical foundation for some of it (not, like, Elliott wave theory for the love of God, but some of it), and some smart people believe parts of it, and I guess some people even make money using it. Though probably fewer than lose money day-trading on Fibonacci numbers or whatever. Still, it’s hard to imagine the CFA’s readings on technical analysis making you more likely to make money for clients.

That, too, may be too much to ask. Fundamental analysis and capital budgeting and, um, economics all strike me as having firmer foundations than the stochastic oscillator, but as a way of obtaining predictably higher investment returns they too look pretty suspect, what with efficient markets and all correlations going to one and coin-flip tournaments.

In general, today is a good day to reflect on the likelihood that anyone saying anything about the direction of the markets, or of your investments, is likely to be wrong. The Fed did some introspection this weekend on how it missed the recession. Dick Bové did some Reed-Hastings-style pseudo-introspection today on how, when you always think bank stocks are going up, you are sometimes wrong. Paul Krugman did Alan Greenspan’s introspection for him, because he’s a helpful guy. Sean Egan displayed an amazing ability to avoid introspection. Greece made it a crime to get its debt wrong and/or right. If nobody on the TV can predict markets with accuracy better than chance, it seems like a bit much to expect a home self-study program to teach you how to do that.

The CFA program, to its credit, doesn’t want its CFA® Charterholders® to go around claiming that they’ll be any more right about investments than anyone else: you can tell people “I have learned so much about making investment decisions through the CFA program,” but not “I make good investment decisions because I am a CFA® Charterholders®.” I think. I’m not yet passing the ethics sections. (Also, I think you can’t say “CFA®s calculate more IRRs before breakfast than you do all day” because CFA® is not a noun, or something.)

But the program does reflect a view that is looking a bit quaint: that the path to success in the financial markets is ethical client service, diligent work, careful reading of financial statements, and a basic understanding of probability and statistics. This is a world untroubled by rising correlations, undisclosed conflicts of interest in CDOs, 2+% S&P moves every day, algo trading, thirteen-trillion-dollar secret Fed bailouts. It's sort of a 99% perspective for the 1%, success via hard work and playing by the rules rather than government favoritism or winning the tournament for global stardom.

I hope it's right. Because if I pass Level I, I'm going to start day-trading using my 1/3-CFA® skills, and I will expect to outperform the market at least 33% of the time. That's how that works right?

* Quotes approximate / made up.

** After reading this, I tried to explain “technical analysis” to someone not in finance, noting that it is neither technical nor analysis. We concluded that the more strenuously a financial name claims seriousness, the more likely it is to be a scam. So stay away from the High-Grade Structured Credit Strategies Fund, and don’t even consider the Preservation of Principal Fund.


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