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!

quants
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! πŸ˜‰

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 protegΓ©s! 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.

11 thoughts on “Scythians and Psyche 77”

  1. Just saying hello, cause we seem to have some stuff in common.

    I’m a fellow programmer turned portfolio manager, also studying level 2 and very excited about the quantitative approach. Even more so as i’ve been working in traditional index-tracking portfolio management for a year and a half now (that’s right, i changed careers right at the very peak) and the constraints are killing me.

    Anyway, keep up the good work, it feels good to read about someone else’s experience with CFA (even though I’m not half as disciplined as you are – just finished the second Schweser book of five)

  2. nice to hear from you darko!

    yes index tracking doesn’t sound like it would lend itself well to creative types, but at least you’re working on this stuff in the real world. envious…

    maybe your next logical step is to branch out into using quantitative techniques to “enhance” index returns – like whatever Fidelity does with FLCEX to mostly track, but slightly beat, the S&P 500?

  3. *clapping hands*

    You are absolutely correct about focusing on and using your strengths instead of dwelling on your weaknesses. I try to follow this, in my life and in my pursuit of the CFA designation, but at times it is extremely difficult.

    Working through 6 CFA books, countless questions, and trying to wrap my mind around all the material is, at times, something I can’t see my self successfully doing on exam day.

    Whenever I get that feeling I just start to think about what I can do and what I do know/understand and it usually turns my mood around. Which is extremely important since time is a precious and limited resource before exam day which you don’t want to waste worrying about a single problem or concept.

    PS. I know time is limited but I wish you had more frequent posts, enjoy reading them.

  4. hey thanks for the props yellowman and it’s great advice to emphasize one’s strengths not just in the CFA and investing battle, but in all areas of life. i’ll try to remember that! πŸ™‚

    – lumi

  5. Congratulations on finishing the first round! Now you have plenty of time to review before the exam. I am enjoying the break while waiting to sign up for 2010 Level 2 exam.

  6. hey thanks pudocfa – yep it’s a good thing i have a lot of review time b/c i feel i need it more than Level I. hope you’re enjoying your break and recharging the little gray cells!
    – lumi

  7. Thanks for sharing your CFA experiences Lumi. Helps to know that everyone goes through the same phases of sleep depravation, lack of enough revision and the exam jitters ..

    The level I exam date is approaching and I am still a long way to complete the volumes. Can you briefly tell me how you approached the following:

    1. remembered all the formulae for the exam day?
    2. Difference between IFRS and US GAAP. Do we need to know all the rules difference. I haven’t taken the sample exam yet; so do not have an idea yet
    3. Any guessing you had to do when you did know the answer

    I am just getting lost on the Financial reports volume; eg; deferred taxes, long lived assets. Any luminous logic (meaning light) you can shed on these? Thanks πŸ™‚

    Sri

  8. thanks for writing sri,

    regarding formulae, i didn’t really have a system for memorizing them. i’m usually not a good memorizer and just counted on my having worked enough problems that any i’d need would come back to me on exam day. i did always try to understand the derivation and/or logic behind each formula which makes them much easier to recall than if you don’t know where the equation really comes from.

    same goes for IFRS and GAAP. when i was first studying i thought i’d make a nice list of all the key differences… but i never did. whatever differences were emphasized in the problem sets were what i remembered for the test.

    The recommendation I have for the FSA stuff is just to keep going and don’t worry about how lost you feel! There are some nice summary chapters near the end that, for me, made it easier when I went through the stuff a second time. I can’t say I ever felt that I really knew FSA thoroughly going into the test. Perhaps I just got lucky that the parts that were tested were the parts I happened to understand well.

    Hope this helps – my main advice is just to keep working and re-working problems as much as you can until test day. Good luck! πŸ™‚

    Lumi

  9. Lumi(nous),

    I was just looking up stuff on historical stock split & dividend data, and google threw up your website. Good stuff.

    I am surprised that you decided to pick up CFA after studying electrical engg. Andrew Lo’s, Hasbrouck’s, Dennis Sasha’s, Cochrane’s, these guys’ works would have done you far better πŸ™‚ In any case, CFA curriculum is rather outdated and useless when it comes to quantitative methods – they can’t quite make it too quantitative to keep their candidate market intact!

    Signal processing is quant enough if you want to trade : )

    But hey, good luck with CFA nevertheless!

    I’d be curious to know whether you’re doing any high-freq or are more on asset allocation side? Are you using KDB, APL/J?

    Anyway, again, good luck!

    – Vishal

  10. hey vishal!

    i think quantitative will be the major part of my secret sauce – assuming i still believe in secret sauce – if and when i make the jump from engineering to investing.

    i thought about working my way through some more books instead of the CFA as you mention, but in the end i was also after a broad, “well-rounded” education. also wanted something official to go on the resume.

    you’re not the first to mention that my signal processing background alone might be enough to get me in the quant door. but it seemed like due diligence on my part to get some sort of formal business training too before i touch other people’s money. maybe silly…

    i thought about going back to school for a degree in something like Financial Engineering – but the CFA program let me do it all in my spare time while still working so that closed the deal.

    re: my own trading, in the beginning i was doing lots of short-term stuff and doing quite well at it, but taxes were eating the majority of my alpha. if there’s one overriding theme in the CFA program is that i find the more i learn, the less i feel i know. each passing chapter gave me less confidence in my previous techniques so i turned into an asset allocation guy with my real money while simultaneously running quant-ish sims with play money looking for a robust version 2.0 short-term strategy. i do it all in Matlab.

    re: my tibetan experiment, that came from about a 90% interest in foreign languages and 10% interest during that time of my life in buddhism. the foreign language bug remains with me to this day, but it’ll probably only be during retirement that i’ll have the time to pick that back up. πŸ™‚

    thanks much for writing – would be interested in hearing about your own trading and research either through comments or email.

    good luck back atcha – lumi

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