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

One Simple Thing

by Lumilog on April 28, 2012

Only about 1 month to go until exam day. Have I been studying?

Even at Disney World, people!

Truth is, while I have been logging a couple hours a day studying, I certainly have not put all other projects on hold in order to focus like a laser on only the CFA.

There are three problems with that approach:

(1) TVM
(2) J-factor Risk
(3) Regret Aversion

Let me elaborate.

TVM is the time value of… my time, a.k.a. opportunity cost. In addition to my beloved equities analyst consulting gig, I have a number of side projects going on too. You could call these my private equity allocation as most may not end up being worth the time & money I sink into them, but… you never know! Have you seen how I’ve been climbing the leaderboard for the $20,000 pot of moolah over at Kaggle?! Did you know I’ve sold almost 120 iPhone apps in the past 5 weeks (thanks to my wife’s media blitz)? That the blog has earned $13 in Amazon referral fees this month alone? That a Google Adsense check just arrived in today’s mail? That despite hate-hate-hating the clothes of a certain retailer, I turned a 30% profit in just a few weeks after my mad valuation skills (careful spreadsheeting of worst-case EPV) just forced me to buy their stock? And that I’m now 1 week into Stanford’s free machine learning class?

Give up all this? For more GIPS?!

J-factor Risk relates to my belief that there are Just a lot of other factors besides how much you studied that influence whether you pass or fail. These include how used you are to the testing format (it changes every level), whether you sleep well and wake up on the right side of the bed on exam day, how smart your fellow test-takers are that year (for the curve), and whether the material you happen to be good at is what they decide to test that year.

Regret Aversion is absolutely why I refuse to give my whole life over to studying for the exam. I have a strong aversion to possibly spending huge amounts of time preparing, later finding out I failed, and regretting the time wasted – so much so that I consider not continuing! Is it really true that 75+% of the 50% who passed Level III last year were there for AT LEAST the second time? With those odds, I should have just shown up, said hi to familiar faces, practiced an essay question or two to see what they are like, and vamoosed!

So I put in my teensy 2 hours per day. Then I have some chocolate, to make sure my brain continues to associate CFA study with pleasure (thank you Charles Duhigg).

More like it...

Well it would be unfair for me not to provide some insight into the mindset of the OTHER approach. Robert Baer, (quoting his downhill ski teacher) said:

“We all have to take risks in life, sometimes grave ones. Risk it all and you just might win. Hedge your bets and you never will.”

For a detailed description of how one guy DID NOT hedge his bets, and passed Level III on the first try (he did that on all exams) check out the link to Patrick’s story below. 407 freaking hours he put in for one year! I’ve only added 100 to my original 240 from last year!

How to Pass the CFA Level 3 Exam

And here’s another person with laser-beam-like focus on one goal, Diana Nyad, who is yet again this year attempting to swim from Cuba to Florida – probably about the same time we’re in our exams. Her conviction is contagious.

You only have to do one simple thing to pass all the CFA exams, or achieve any goal for that matter, and that is to never quit.










{ 10 comments… read them below or add one }

Sam May 2, 2012 at 2:52 pm

thanks for the link to Patrick’s blog .. Does any one have a view on what Patrick shared on his blog on essay answering .. copied an excerpt below.. I do not have schweser subscription, but would like to know any tips on answering essays .. I looked for any videos on youtube for essay answering tips, but did not find anything .. let me know if you have any handy tips .. thanks,

February, 2009

The Schwser class was an eye opener. The professor showed us how to answer the essay questions, and what I thought were very obvious right answers turned out not to have touched even one word of the answer key. The grader would have to give me a zero. There was a lot of work to be done here not so much in terms of the difficulty of the material but rather in learning what the CFAI expects.

Lumilog May 2, 2012 at 4:13 pm

I hope others will comment, but here is what I remember hearing from one of the Schweser lectures I was using last year.

As I understand it, the big difference is how partial credit is awarded. If a question is asked and you provide an answer that is descriptive and correct, you might expect (in college) to get at least partial credit. On the CFA exam though, you might very well get 0 points since you the grader is looking for just certain key words / solutions on his answer key.

An example (which I’m making up): You are given the task of matching a client with an appropriate active manager. During the last 5 yrs, Manager A has delivered an active return of 2.5% annualized with an active risk of 3% and misfit risk of 1%. Manager B has delivered an active return of 3% annualized with an active risk of 4% and misfit risk of 0.5%. Which manager should you pick for your client?

Now, if you don’t know what the grader is looking for, you might write a paragraph about how risk and return are linked, describe the efficient frontier, how Manager A had lower excess return but also lower tracking error, which might be desirable based upon the IPS, the client’s risk constraints, etc.. Manager B had higher active return but also obviously takes more risk. The misfit risk is a gauge of how each manager’s benchmark differs from the client’s benchmark, and blah, blah, blah. You might go on to write a whole paragraphs of TRUE STATEMENTS maybe even bringing in various CFA Level III concepts but that will get ZERO CREDIT because the grader’s answer key says:

Give 2 points for correct computation of Manager A’s information ratio:
2.5 / 3 = 0.83

Give 2 points for correct computation of Manager B’s information ratio:
3 / 4 = 0.75

Give 2 points for correct recommendation:
Manager A should be selected due to higher information ratio.

This is probably even more crucial for the non-quantitative sections. If you’re asked why taking on debt is better than issuing equity to motivate management you can probably come up with 10 great reasons, but the grader has sentences like these to check yours against.

Debt eliminates excess cash which managers may waste.

Debt requires managers to ensure firm liquidity to repay debt.

And so on.

If your answer doesn’t match one of these (not necessarily word-for-word, but very closely) it’s zero points for you.

A college professor will read your answer closely to see if what you say is true and if you got the general idea. But the grader is basically looking for simple sentences that match his answer key. At least that’s what I’ve concluded.

Hope that helps.

Sam May 3, 2012 at 5:37 am

Ohh .. that’s insightful .. thanks for taking time to explain the concept .. Lumi

I was just busy cramming the books and hardly paid any attention to this aspect of answering the essays. Seems like I need to look at the question in a different light than what I have been doing. hmm ..

In your examples, how would you know whether the grader’s answer keys contain all those TRUE STATEMENTS or certain quantitative ratios (or other answer keys). Meaning, how would you know which way would you chose to answer in the alternatives that you gave..

I am guessing that we need to identify the key concept the question is really testing .. and the critical piece of info that can decisively answer the question .. is what the grader will go after …

Thanks again

Lumilog May 3, 2012 at 7:12 am

Yes I think you got it (key concepts, succinct answer). Of course I FAILED the test last year so be sure to get input from others! Hard to know what exactly is on their answer sheet, but probably the more you use the same wording as they use in the textbooks, the better. Perhaps the answer sheets for the CFAI mock exams have more clues (haven’t looked at any of theirs yet – using my Schweser mock exams from leftover from last year). GOOD LUCK!

yellowman May 7, 2012 at 7:55 am

Hi Lumi,

I just hope after all these hours of studying, the questions on the exam are the ones that I have an answer to (your J factor). Everyday, I seem to refresh a topic but inevitably push another topic out the back. With all this material being covered, just always wonder come exam day, will I have the right material in my head.

From your post, sounds like you are grinding and I wish you luck come exam day. Under a month to go!

Aussie Matt May 11, 2012 at 12:24 pm

Goodluck to you and all the other cfa candidates out there – let’s make this one count! And good luck in your kaggling Lumi (funny to see you mention this as I used to work with Ant Goldbloom and have been following Kaggle’s development with interest).

Vancouver June 1, 2012 at 1:50 am

Good Luck to you on Saturday – Hope we never have to write another exam again.

Lumilog June 1, 2012 at 7:10 am

Right back atcha, Vancouver. Me too.

vhoythoy July 5, 2012 at 2:11 am

I am inspired by your blog to pursue CFA next year. Will definitely do it by Dec 2013. Seems a bit too far from now =). The reason is i still have some certifications within the year to complete before focusing on Finance specific certifications.

I hope i can make it. Im very passionate with Investing, stocks, etc. My strength is on accounting but needs to put some effort on math and quants.

Goodluck =)

Lumilog July 24, 2012 at 1:13 pm

vhoythoy – if you’re passionate about it, the time spent studying will pass quickly. having strength in accounting should be a huge plus. good luck!

Leave a Comment

Previous post:

Next post: