Scythians and Psyche 77

For a chronological index of my path to the CFA, click here.

Just completed the last problem from the last chapter of the last study guide for the Level II exam. You’ll recall for Level I, I only had 40 days of review time prior to test day. This time I have almost twice that – 77 days!

Future Quants

And I must say it’s a good thing I have more time because I feel I’ve retained much less from this first pass than I did in Level I. Somehow I was plagued by an Efficient Markets cloud while studying a lot of the Level II material. It’s easy to fly through the thousands of pages of material if, in the back of your mind, is a raging I’m going to fuse all these CFA tools into the ultimate investing system and take over the world motivation.

But blame it on the market funk or just plain laziness, lately I’ve been less obsessed with homebrewing my secret sauce trading algorithm and instead just double- and triple-checking that my current buy-and-hold cruise control asset allocation scheme makes sense (it has changed slightly since this post).

However, inspiration can be found in the most amazing places, and recently I found it in Dan Carlin’s Hardcore History podcast. He did one about the Steppe peoples that hit me like a bolt of lightning. In particular he was talking of the Scythians and Mongols and what incredible archers they were, hitting small targets at full gallop, firing behind themselves with deadly accuracy while fleeing (or pretending to, hee hee), and even swinging way down on one side of the horse while riding so that they fire from underneath the horse’s neck, effectively shielded by the horse’s body! 😉

What I concluded was that these warriors were not deadly in combat because they took the time to study the fighting styles of others, integrating them with their own into a “well-rounded” fighting system. That would be a training focused on improving one’s weaknesses, and with so many different fighting techniques to learn, they’d end up being a perpetual student – a jack of all trades and master of none. Instead, they simply exploited their strengths. All archery & horses. All the time. Period.

To be sure I enrolled in the CFA program to get a well-rounded investing education, and it certainly seems to be providing that, as much as textbooks can. But if the stock market is my battlefield, what are the chances that I’d ever mop up the competition by applying my above average, but still novice level, financial statement analysis and economic forecasts against the best and brightest from Harvard, Chicago, and Wharton?

I’ll certainly continue to work my way through the CFA program to round out my education, but one thing seems clear about what which parts I’ll actually use in life after the program. I have essentially been a computer programmer, algorithm developer, and engineer since the days of the Commodore 64. If I’m to be successful in the wealth accumulation battle doing anything other than asset allocation, it’s going to be with a quantitative approach. Luckily the CFA program provides quantitative material in spades.

Let me rephrase part of the last paragraph… Asset allocation through indexing is a fine way to invest. What I (and everyone else) am looking for is a way to add alpha, or excess risk-adjusted return. And exploiting my strengths seems the most probable path to success. Does the Scythian waste training time trying to learn a little Greco-Roman wrestling to be more well-rounded in his upcoming battle with centurions? Madness!

Arm me with economics and financial statement analysis, and I’m more likely to cut myself with my own weapon than anything else. But in the quantitative arena, where I have formal training, expertise, and years of experience, I might even be – dare I say – formidable. So bring on Andrew Lo and all his protegés! I even have a few patents, confound them!

Ah well, I’ve reached the end of the post and haven’t even mentioned what I liked about Volume 6: Derivatives and Portfolio Management yet. Because I’m pressed for time, I’ll pick just one highlight. The next to last chapter in the volume is all about the effect of taxes. Now many of us have a mixture of taxed and tax-deferred investment accounts. I’ve always thought that the overall asset allocation is what’s important, but not also asset location! But what if you’re basically a buy-and-hold investor who is accumulating both stocks and bonds? Since contributions to tax-deferred accounts are limited, that should be where your bond purchases are made, to protect the regular fixed income they generate. Meanwhile, the low-dividend equity indexes can be quite tax efficient on their own in a regular old taxed account. Brilliant!

Well since it worked for Level I, my approach to reviewing for Level II will be exactly the same as before. I’ve shuffled the chapters of the 6 study guides and now begin my second pass through the chapters in random order, not necessarily re-reading but absolutely re-working all problem sets. Matlab says my random order is:

58 33 2 45 47 66 7 15 51 25 9 42 21 63 14 68 18 34 62 4 49 1 17 31 6 41 60 65 40 37 11 69 27 44 16 48 46 28 5 70 13 43 57 12 19 26 61 32 39 29 67 53 10 24 54 22 30 56 3 8 35 52 20 59 23 50 38 64 36 71 55

Wish me luck and hope the rest of you are making good progress!

Read/Work Problems of Volume 1: 26 hours
Read/Work Problems of Volume 2: 15 hours
Read/Work Problems of Volume 3: 13 hours
Read/Work Problems of Volume 4: 32 hours
Read/Work Problems of Volume 5: 19 hours
Read/Work Problems of Volume 6: 29 hours
Re-work Problem Sets a 2nd Time: 25 hours
Total Preparation Time So Far: 159 hours

Update: I finally passed all the CFA exams and wrote an eBook about the program. If you’re interested, click here.