Call me naive but I thought that while the individual stocks of the indices are chosen by humans, most index funds tracking them were essentially managed by computer mostly based on market cap and that’s why expense ratios are so low. But all index funds tracking the same indices don’t get exactly the same returns so there’s something I’m missing here.

My mood has lightened since finishing Volume III. But I’ll save that for a new blog post!

- Lumilog

As for the volume of material it seems overwhelming but my guess is you are retaining more than you think. for me, on level I and II i thought i had no chance until i took the third practice exam and finally got over a 70%. keep in mind this after 5 months of studying and not until 3 days before the exam. I finally thought wow i have a chance.

Hang in there folks.

On CFO…It doesn’t matter when they sell really, so long as the entry point has MOS. They would buy if they knew the stocks are undervalued right? If they sell out of necessity, even better…more undervalued shares are avail (cateris paribus)…

“I’d be curious as to your opinion about this famous speech, concluding that if beating the market consistently is all about being a lucky coin flipper, the value investors seem to be better coin flippers than most.”

Indeed, value investing is the way to invest…problem is…..drum please….I can count with my fingers and toes who the “true” value investors are! Labeling one’s self a value investor and practicing it does not “automatically” transform into a magnificent return on capital…Oh Humanity! It misleads us to truth….

Here’s what I mean….
There are 20 coin flippers…10 are value investor type chaps and the other 10 not…

Collectively the 10 value chaps’ avg. ROIC is 18%, thus beating the market avg of 12%. — definitely join this group…

The 10 non-value chaps’ ROIC is 6% — stay out of this group, no doubt…

Look a little closer to our value chaps and lo and behold…
1 out of 10 crushed the mkt – ie, Warren Buffett
3 out of 10 performed about mkt level return
6/10 did well relative to non-value chaps but did not beat mkt…(9to10% ROIC)….

Now the Big picture and the Bottom Line!!!
only 1 out of 20; crushed the mkt….
3 out of 20; performed at mkt level..
16 out of 20; well…..

translation: the best investment strategy is simple asset allocation across a handful of relatively uncorrelated index funds with periodic rebalancing.

Thank you CFA books for confusing us and thus guiding us to the light !

Truth be told the little hintergedanke(s) that make it hard to keep studying when passing through the less interesting (or completely overwhelming) CFA study guide chapters are the ones you outlined above – especially Bernstein.

Except I had never heard the one on MOS based on insider buying so thanks for giving my unconscious some additional ammunition! Maybe I’ll just tell myself that sometimes CFOs have to sell shares in order to write a check for Buffy’s college tuition, or for the divorce settlement with Muffy.

I’d be curious as to your opinion about this famous speech, concluding that if beating the market consistently is all about being a lucky coin flipper, the value investors seem to be better coin flippers than most.

My hope is that what I learn about markets, economics, and business fundamentals in the CFA program will help reduce my average error when estimating intrinsic value. But that may indeed be wishful thinking.

-Lumilog

“But I must say that I’ll be a bit disappointed if the day I get my charter in hand, my thinking at the end of it all is that the best investment strategy is simple asset allocation across a handful of relatively uncorrelated index funds with periodic rebalancing.” BINGO !!!

How sad would this scenario be!!! But I think this is where investing boils down to. How can it not???

Let me ask you this: If the CFOs or CEOs of a given firm knows the inside and out of their firm (strengths and weaknesses), wouldn’t they know what particular growth rate, discount rate, and earnings to use in “their formula”? So why not just research their buying price and add a Margin of Safety on it? If they buy at $10 we buy at $8, providing a 20% discount. Our exit is 20% above their price of $10, so at $12. They make 20% we make 40%, They lose 40%, we lose 20%. This is like the mother of all margin of safeties. Without the work of recasting earnings!!! as suggested by the great CFA>.

Here’s a few quotes:

By periodically investing in INDEX funds, the know-nothing investor can actually out-perform MOST investment professionals. Warren Buffett.
note by me: Know-nothing to me means non-insider or someone who is not in the board meetings discussing strategy…

Super stock trader Jim Cramer pays Bogle’s investment style the ultimate compliment by going on record as saying that “After a lifetime of picking stocks, I have to admit that Bogle’s arguments in favor of the index fund have me thinking of joining him rather than trying to beat him.”

“The only value of stock forecasters is to make fortune-tellers look good.” – 1992 Annual Report of Berkshire Hathaway

and one more for the road…….

“There are two kinds of investors, be they large or small: those who don’t know where the market is headed, and those who don’t know that they don’t know. Then again, there is a third type of investor – the investment professional, who indeed knows that he or she doesn’t know, but whose livelihood depends upon appearing to know.”

- William Bernstein, The Intelligent Asset Allocator

The main reason behind changing my tactic is that though it has worked well, we were mostly in a bull market the whole time I was using it. And bull markets tend to make almost everyone’s “system” work well.

The recent downturn has knocked around my portfolio a bit – though I do seem to be tracking the indices fairly closely. However I have a few stocks that I bought at what my old system said was a 50% margin of safety. Now they’re at an 85% margin of safety!

Good words on the CFA maybe not being the answer to better investing but perhaps an answer to a better career, and I know we can’t all be above average (except in Lake Wobegon). But I must say that I’ll be a bit disappointed if the day I get my charter in hand, my thinking at the end of it all is that the best investment strategy is simple asset allocation across a handful of relatively uncorrelated index funds with periodic rebalancing.

Pleeeease noooooo…

- Lumilog

I hope you DO find/receive what you expect from the CFA program. In the meantime, you’re right on staying conservative with your investing methodology until your confidence and your chances of success in investing has you in the higher probability mark again…

My question is: Why change your tactic if they have been working for you in the past? I know your new found knowledge has you hesitating a bit on pressing the BUY button, but shouldn’t you ride the wave until there’s good evidence that your tactic is no longer valid?

Remember investing is a zero sum game. Somebody has to lose and somebody has to win, regardless if all known humans in the world are CFAs. My point is… CFA might NOT be the answer to better investing as you are expecting, but it CAN be the answer to a better career.

Investing and career in investments could be mutually exclusive per individual and that your thought of CFA to fill both gaps could be misleading…

until then….

Mike – nice to hear from you. Yes I guess I’m growing up after all! Volume III so completely undermined any ability I thought I had to pick stocks that I’m moving any money I get from selling long positions into stock and bond index ETFs until I have a new methodology that I have confidence in (maybe Volume IV will give me that?). In The Intelligent Investor Graham recommends that a minimum of 25% of your portfolio be in bonds so I decided to dilute my 100% stock portfolio and put some money into a Total Bond Market ETF and a TIPS ETF.

Indexing should only be temporary if I get what I’m expecting from the CFA program! In the mean time, anything but money market…

-Lumilog

Congratulations!!! You have been transformed from a trader into a true investor…If working for a firm, a trader can make big bucks using the firms capital. Trading alone using one’s capital is a long shot to riches. A true investor is the opposite of this thought…

You have not posted in awhile and I thought you had given up entirely on the CFA…

I wish you well, and hope you continue your search for wisdom and wealth…

On the ETF – Why Bonds? American economy is surely in deep trouble if we are to continue on this low interest rate era. And if the Fed decides to turn the rate around your investment will be at risk…Do you think interest rates will be this low in the next 3-5 years? If yes, you are correct on your forecast on Bonds. If not, it’s time to reallocate your funds…just a thought…again good luck to you and I hope you continue posting…