“CFA exam shows charts have no validity”

I was reading an interview with bestselling author William O’Neil on the Globe and Mail this morning and he had a few criticisms of the CFA program that I thought were interesting.

reportonbusiness.com: The importance of being diligent

You have made no secret of your disdain for market theorists.

I have never made money listening to the academic community.

A lot of the things being discussed there are not as accurate as studying what the market’s actually done, cycle after cycle.

For example, the CFA exam shows charts have no validity. What they’re saying, in effect, is that supply and demand doesn’t work.

Yet the way to make money in the market is to study the market. It would be a good idea to ask the academics or CFAs how successful they’ve been in the market.

CFA in The Economist

There’s an article about the CFA program in this week’s The Economist.

Financial exams | Charter school | Economist.com

ON THE weekend of June 7th and 8th, up to 175,000 people round the world will face one of the most arduous tests of their lives. They will sit one of the three exams required to earn the coveted status of chartered financial analyst (CFA).

One of those candidates will become the millionth person to take the test. That is phenomenal growth for a qualification that, as recently as 1995, was taken by fewer than 20,000 people a year. This expansion partly reflects the lure of earning big money in finance (at least until the credit crisis). But it also shows the growing appeal of the CFA brand outside its American birthplace; more than two-fifths of this year’s candidates come from Asia, where job ads in the South China Morning Post now often say “CFA-required”.

That’s an incredible growth rate. I also sense that this may be the reason why the passing rate is falling year after year. As the CFA is becoming more accessible and popular, a larger variety of people are writing the exam. These candidates include those who are switching careers and may not necessarily be ready or cut out for all the number crunching. Others may think that writing three exams is the key to their financial success but underestimate the difficulty and the amount of preparation required to pass them.

They mentioned that only 1/5 of those who register actually complete the entire program (all three levels). I believe it’s partly because there really isn’t that much of an incentive to finish the program. I think just completing the first or second level is a good enough stepping stone to enter the finance industry, or a similar field in which having such a quantitative qualification is an asset. Perhaps just completing (or even  starting) the level one is enough to be hired for a certain job or be promoted to a new position. From there, candidates can choose to supplement their knowledge with real world experience or another designation.

And there are others who are in the program for interest’s sake. They may just write the first exam to gain a good foundation of the financial system and learn about investing their assets. These individuals don’t need to complete all three levels and it would be unnecessary and costly – both time and money – to do so. 

As for me, I think the CFA will be a good stepping to enter an alternative career path (coming from a Cell Biology background) and at the same time learn about finance and investments.

Good luck to those writing the exam this weekend!

Choosing a calculator: TI BA II Plus

Aside from the textbooks, there is one other item that you will get to know very intimately when studying for the CFA exams: your financial calculator. The CFA Institute lets you choose between two models: the Texas Instruments BA II Plus (or its Professional variant) and the Hewlett Packard 12C.

Unless you are already accustomed to the HP 12C, the de facto standard when it comes to financial calculators, most people will recommend the TI BA II Plus. I had the chance to try the HP 12C, on my iPhone no less (there’s an emulator available for download). The first thing I noticed was that I couldn’t figure out how to use it! Adding or subtracting didn’t seem to work, nor did any other basic mathematical function. At first, I thought my iPhone was just acting up (crazy, I know) but I later found out that the HP uses something called the RPN (Reverse Polish notation). To add 1 and 2 together, you would type in “1 2 +” instead of “1 + 2”. It gets even more complicated when you have multiple operations. On top of that, it has a slower processor (HP opted not to make any changes since its first release in the early 80’s) and more expensive.

On the other hand, the TI looks and acts like any standard calculator. It lacks the prestige of the HP 12C, which is commonly given out to financial analysts at many of the big investment banks, but its more user friendly operation, more extensive functionality and cheaper price tag, makes it, in my opinion, the better choice. As mentioned, there’s also a Professional variant available which comes in a sleeker exterior with more built-in functions and an even faster processor!

I just bought the TI BA II Plus Professional today at Amazon.com for $33.78 shipping inclusive (US only). It’s a great deal considering you can’t find it for less than $50 elsewhere. In Canada, it goes for $70+tax. I suppose I’ll get it in about a week’s time and you might hear more about it in the future, but the fact that I can already write this much about calculators is impressive, non?

The CFA

I first heard about the CFA designation last October when I stopped by an information session held by Stalla at my university – the University of British Columbia. At the time, I knew almost nothing about the CFA, and I was just a Biology student interested in finance. Little did I know that only a few months later, I’d be starting a blog about it.

Like all good things in life, getting the CFA designation isn’t exactly easy. To become a charterholder, one must complete three exams and accumulate four years of professional work experience. The exams are known to be very challenging with a passing rate of about 40% for the Level 1. The passing rates for the Level 2 and 3 exams are around 50% and 70%, respectively – not because they’re any easier since one would have had to be knowledgeable enough to have passed the previous exam. So really, they keep getting harder and harder. The exams are only offered in June, with the exception of the Level 1 which is also offered in December. Needless to say, it’s a long and difficult journey.

Why do I want to get the CFA? Interest. As someone who doesn’t have a strong background in finance, the CFA offers an opportunity to get a formal education in the financial industry. There are of course many other reasons and I’ll probably write more about them later on, but it really all boils down to interest.

At this point, I haven’t yet decided when I’ll be writing the Level 1 exam. It will either be December 2008 or June 2009. I’m finishing the last year of my undergraduate degree so I might not have adequate time to prepare for the December exam, but I may write it just for practice. In any case, over the next several months, I’ll be dedicating more time in studying for the Level 1 exam, and working my way in getting the CFA!