Sunday, May 31, 2009

My experience passing the Chartered Financial Analyst (CFA) Institute Level I exam

In 2006, I met some technlogy people who had business designations. One, an architect, had a treasury designation from the Federal Reserve. And another, had a Chartered Financial Analyst (CFA) designation. I'd been looking to get closer to the business side, and take a larger leadership role in the systems I'd been developing. Their designations seemed to help them, so I decided to do the same. But what a LOT of work!

The CFA program is a graduate level self study program. One of the prerequisites to
enter the program is that you already have a bachelor's degree. There are three levels (exams) to pass, Level 1, 2, and 3. Abbreviated as L1, L2, L3. And, before attaining the charter, you also have to work in the finance business for a number of years.

For L1, there are 10 major sections (study sessions), and 78 readings
altogether. The official books had about 3000 pages to study, read, and retain! By the time I started, I was estimating that I would need to read and retain, about 30 pages a day! And then review, and write practice tests, to prepare for the big exam. The official website says, "Each level demands a minimum of 250 hours of study, with substantially more, depending on individual circumstances". That is an equivalent of over 6 weeks of full time, 40 hours of work! But I know I studied more than 250 hours.

The CFA exams are pretty hard. On a single day, there are two 3 hour exams, one in the morning, and one in the afternoon. Each exam has 120 questions. In 2007, the percentage of people who passed L1, was somewhere around 40%. And only 40% passed L2 and 50% passed L3. Clearly, this is not the same passing rate as found in most university programs!

In 2007, 71,172 candidates wrote the L1 exam, and
28,125 passed, about a 39.5% pass rate. But only 6,399 candidates passed the L3 exam. So, of those who start the program, significantly less pass L3. See the complete stats here:

So I say, there is no grade inflation, or designation devaluation, in
the CFA program. If you see someone with CFA after their name, you know that they have accomplished something serious. I've since met one Japanese lady, who wrote the exams in English, not her native language. And English and Japanese are not like Latin languages that all have the same root. Pretty smart if you ask me!

The lessons are definitely at the master's level. L1 had a big section on
quantitative methods. In finance, it could be used to find correlations between economic indicators, company financial numbers, and values a stock might take in the future. In my bachelor's degree, I'd already aced a number of statistics classes. But these quant readings were at a whole new level. I really had to work at them.

I felt that I was at a serious disadvantage. I'd been working on the tech,
not the business side. So, a lot of the business terms and practices, while second nature to those on the business side, were unfamiliar to me. Options were a really new paradigm that I had to work on. I'd always bought mutual funds, or stocks "long". The idea of buying an option that was "short", with the expectation that the instrument would go down in price, was new to me.

I compared my disadvantage to a business person attempting to attain
the professional designations for Oracle, Cisco, Microsoft, Java, and Linux. All at the same time.

Eventually I wondered what an MBA equivalent would be.
I estimated that it was -at least- as much work, as taking five full time (September to December, three hour) classes. And then you wrote one big exam for all of them combined. Perhaps it is closer to the equivilent of a whole year's worth of MBA classes.

I did a lot of studying. On Saturdays, I would go to the university,
and study from the afternoon, until about 10 PM. When the exam approached, I started at 10 am, and studied just as late.

One of the big aids that helped me was the video CDs from Schweser, which I
bought used on Ebay. These are lectures, and powerpoint presentations that you watch on computer. With all the documentaries I watch, you can probably guess that I really like to learn through audio visual media. Like a regular lecture, the prof writes a few lines on the board, but they speak hundreds or thousands of words about the subject. This I find always helps me learn faster than just reading the text and diagrams in books.

The other thing that helped me was to do as many questions that I could find.
It's not enough to just remember the concept. To answer a lot of the exam questions, you have to use multiple equations to find multiple inputs for a final equation. You also have to really know the concepts. Systematically doing the questions, and discovering what the right answer is, works for me.

Like all university courses, some subjects are not always
explained as clearly as they should be, and were really confusing. Such subjects I usually looked up on the internet, my big library. So after I figured these subjects out, and explained them simpler, and better than the textbooks did, I wrote them down. One confusing subject that I figured out, the Percentage of Completion vs Completed Contract method, was actually found on the exam. So I was really happy that I made that confusing subject, simple enough to recall.

Writing things down always helps me with reinforcement, and to remember.
Part of this is to make my own notes. I made a whole bunch of electronic notes on my laptop. Those were great because they could be searched really fast. And, I made paper notes that fit into a binder. These I took to the exam, and reviewed before the two exams. I wrote them to be, "instantly digestible", for this fast food generation.

I also started the Boston CFA study group on You should still be able to see my picture there. The idea was "For studying, career, networking and socializing." Unlike MBA students, CFA candidates working in isolation don't make contacts. So, this way, we could help each other out when studying, and make friends in the industry at the same time.

In June 2007, I wrote the Chartered Financial Analyst (CFA) Level I exam.
Some L2, L3 candidates were sitting beside me. One guy finished with over 25 minutes to spare. After the exam, I found out that he worked for Bear Stearns. Later, it went under! Beside him, was a woman who got up and left with over 1/2 an hour to spare. I looked up and wondered, "did she ace it, or just give up?". She looked really confident, so I figured that she aced it. And I finished with a few minutes to spare to review some answers I wanted to double check. Just in time.

In August, I found out that I had passed. The exam was tough, and I hadn't
expected to pass, but I did. I was so happy! I couldn't remember the last time I was so happy. Cool!

A whole section of the CFA program is on debt instruments. Soon after I passed L1, I
interviewed with, and had a job offer at a financial company that specializes in bonds. The company sponsors their employees to take the CFA program, and I think they liked the fact that I had passed L1. So, there was some reward for all the work.

In retrospect, one of the things that impressed me about the CFA
program, was the big emphasis on ethics. I've read, and heard, that if one candidate aces every section, but doesn't do well in ethics, that (s)he will not pass. After all the scandals in finance the past few years, it's refreshing to see. I've thought, those guys don't have a CFA designation. In fact, one of the key people who was sounding warning signals to the SEC about Bernie Madoff, Henry Markopoulos, actually has a CFA designation.

For more information on the program, see the CFA Institute homepage.

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