I don't believe I can fly. But I think I can pass the exam.

My lousy photography skills (ha ha! what skills?) totally don’t do justice to the picture, but somehow I feel more peaceful. Even though I don’t have 100% confidence in passing, I kinda have a perspective that failing this exam in the bigger picture is not that big of a deal.

I’ll just have to use these last 3 days as best as I can. Good luck to you all, fellow candidates.

Here, take a look.

Lousy Scores!

And I’d taken the L1 sample exam even later last year too!

Let’s see how this correlates to my actual L2 exam score in August!

Studying, studying, studying...

Not me. I got my result because I prepared well. I’m not some bright young man with a lot of time to dedicate 4 weeks to cram L1 material into my head. I have a full-time job that requires me to work until late at night during weekdays–sometimes even weekends. I need to balance my study sessions with my family life although my wife is very kind and understanding about the whole thing.

When I began my L1 preparation, I went through a period of trial and error for a few months. In January 2009, though, I settled on a strategy that has proven itself to be helpful in getting the result that I desired.

Obviously, between January and June 2009, a lot of things happened. So I’d like to share what happened during that 6-month gap in this post. I hope it’ll be of some use to level 1 candidates reading this.

Exam Preparation Tips (6 months – 1 month before the exam)

1. Start as early as you can. You’d be surprised by the number of smart people who think that this is just something like a school exam that you can pass by cramming for a few days. Sure, there are candidates out there who studied only for 2 weeks and passed the exam, but you are not one of them. Trust me on this. It’s a bit like the lottery winners. You know they exist, but you’re not one of them. Start as early as you can.
2. Realize that you can be a really smart person and still fail this. I know quite a number of really smart people who failed this. They are so used to cramming, because it worked for them in school thanks to all that brain power. Well… no such thing for CFA exams. Especially if you don’t have the finance background!
3. Make a plan. Without a plan, you don’t know if you’re behind, on track, or ahead. Seriously, make a plan. Any plan with specific target dates would be better than no plan at all. Again, you’ll be surprised at the number of smart people who don’t plan at all for this exam.
4. Make your plan iterative. Meaning, don’t create your schedule such that 14 days before the exam you just finished reading the whole material for the first time. Retention is the key here. You need to target to finish reading the whole material once at least 2-3 months before the exam. Then go for the next round of reading. I went through the whole material twice.
5. Put some buffer in your plan. Be aggressive with your plan and do not delay anything until the last minute. Because something will happen along the way. You may fall sick. You may need to work on a project that requires you to be in the office 24×7 for a few months. You may break up with your (girl|boy)friend and as the result you can’t concentrate on your study for a month. Etc., etc., etc. Plan for the unexpected and put some buffer in your plan.
6. Solve, solve, and re-solve a lot of practice questions. I did thousands of practice questions from Schweser QBank. I use them for 2 specific purposes. The first one is to have a review of the whole material regularly. The second one is to gauge your mastery of a topic before moving on to the next one.
7. Get some kind of notes. A number of people write their own notes. I started writing one myself too. I quickly found that–for me at least–it was a huge waste of time. I ended up buying Schweser Notes and center my study around those notes. I’ve heard that this strategy doesn’t really work for L2, but meh, this is L1. It worked beautifully for me.
8. Most importantly, be consistent. Pace yourself.  I think one single thing that helps me the most is that I managed to maintain a roughly consistent level of studying throughout. It’s better to study 1 hour per day for 7 days than to study 7 hours on a Sunday. Don’t burn out too soon!
9. Take leave before the exam. Preferably one week or more. It really helps in getting you to the exam mindset and forgets everything else. Obviously you need to let your boss know early about this kind of thing!
10. Practice with your calculator. NPV, IRR, cash flow, mean, standard deviation, variance… these need to be your second nature. And make sure that you get the right type of calculator! You’d think that for an exam like this, people would take the time to make sure they get the right type… well… no. Some idiots still bring the wrong calculator for the exam. Don’t be one of them.

Before The Exam (1 month – 1 week before the exam)

1. Start taking the mock exams. I can’t emphasize enough the importance of taking CFA mock exams. I suggest taking both mock exams 2 weeks before the actual exam to identify your weak points. Patch those weak points ASAP.
2. Check your ticket when it is available. Do this early. Make sure that your name there match the name that is listed on your ID. Make sure that you’ve got the right exam center.
3. Get into exam mode. At this point, you shouldn’t really have any material left to cover. You should be just working on re-inforcing what you’ve learned and applying them in solving the questions.
4. Review Ethics every 2-3 days. You’ll be happy that you did. Memorize the Code of Ethics.

The Last Week (1 week – 1 day before the exam)

Gears of War!

Most of the things here are easy stuff that a lot of people forget anyway!

1. Buy a new calculator battery, and change it 2 days before the exam. Why 2 days? So that if for some reason your calculator gets screwed up while you’re changing the battery, you can still buy another one.
2. Buy TWO HB pencils. Sharpen them and use them just a bit to get the right sharpness.
3. Buy an eraser. If you’re like me, you will make mistakes. Get a good eraser that will erase mistakes cleanly.
4. Buy a pencil sharpener. A number of dudes asked to borrow my pencil sharpener. Apparently they only brought one pencil with them, and they were broken. Duh!
5. Make you you know the way to the exam center! Don’t find everything out at the last minute.
6. Get some good sleep the day before. You don’t even need to try hard to sleep. Just lie down and read something light. Hopefully then you’ll doze off and sleep. But realize that, even if you don’t sleep well, the excitement of the exam day tomorrow will help you to go through it anyway. I slept at 2AM, woke up at 6AM, and I went through the exam just fine.
7. Figure out what you should wear in advance if possible. I went for the exam in a thin T-shirt and three-quarters because I didn’t want to get bothered by Singapore heat during the exam! Well… I should’ve brought a jacket. It was freakin freezing cold in there! The air conditioners were working in full blast!
8. Try to arrange for lunch if possible. My friends had told me way in advance that I should arrange for lunch beforehand. Well, I didn’t do it. Big mistake. The exam place was so packed that the only lunch I got was a smalll piece of bread from 7/11 (that was pretty much the only piece left I think). That, and a can of coffee. Hardly an ideal lunch. By the time the exam was finished I was exhausted, hungry, and cold. Don’t be an idiot like me. Arrange for lunch.

Exam Day

1. Bring your: passport, watch, CFA exam ticket, 2 HB pencils, 1 approved calculator, 1 eraser, 1 pencil sharpener, lunch. I don’t know about you, but I’m not the type who leaves my handphone unattended along with thousands of other bags. So I didn’t carry my handphone on that day. It’s your call.
2. Read the instructions carefully, and remember that proctors got POWERS that day. You’ve spent all those weeks/months so that you can pass. Pay attention and obey the proctors and you’ll be fine.
3. Be calm, don’t care about others. I saw more than a few people went out with more than one hour to spare. Not me. I stayed till the very end verifying my answers. What I’m suggesting here is: just stick to your own style and don’t get affected by what others do.

I’ll see you all at CFA Email Study Group! A bunch of us passed Level 1 in June, so drop by and ask questions if you like. If you’re going for L2 i 2010, please join us in preparing too!

Pure Unadulterated Awesomeness

Obviously the big major humongous thanks go to:

1. My wife, who’d been very patient with me for geeking out for many, many weekends, and was supportive through and through. My parents, who had been very supportive and were obviously very proud to hear that I passed this
2. My bosses! Who have been very understanding and very supportive through and through. Better bosses than you guys, I can’t really find!
3. My fellow CFA candidates over at CFA Email Study Group! You guys have been AWESOME Congrats to all of you who have passed! Those of you who didn’t, I’m looking forward to see you in June 2010 for L2 anyway, because I KNOW YOU WILL KILL L1 IN DECEMBER!
4. His Awesomeness, His Coolness, His Hipness, my one and only:

This thing? IT ROCKS, BABY.

I have to say I hesitated for a while before I signed up for Level 2. Do I really want to burn all those weekends away again? Really? Really really? For another year until June 2010? What am I thinking?

Unfortunately, my fingers are faster than my doubts. There goes my weekends again in 2010…

Man, I Must Love CFA Really Bad To Do This...

See you all in Level 2, folks

The formula is simple:

WACC = w_d[k_d(1 - t)] + w_psk_ps + w_cek_ce

So just like its name, it’s basically a weighted average of the 3 capital components: debt, preferred stock, and common equity.

In some questions, the weights are given as percentage numbers, e.g.: 30% debt, and 70% equity. This is straightforward. We just use 30 and 70 as the weights. 

But sometimes, they are given as debt-to-equity ratio, e.g.: target debt/equity ratio = 0.4. Then Schweser usually explains how to calculate w_d and w_e  from this given ratio in greater details:

First, calculate the weights for debt and equity 
w_d + w_e = 1
w_e = 1 − w_d
w_d / w_e = 0.40
w_d = 0.40 × (1 − w_d)
w_d = 0.40 − 0.40w_d
1.40w_d = 0.40
w_d = 0.286, w_e = 0.714

Dropping unnecessary calculations

This is not necessary–it’s too slow. We don’t need to perform this calculation at all. 

The key point here is that what matters about weights is really their proportion relative to one another, instead of the actual values we use as weights.

That is, if debt/equity ratio is 0.4, it doesn’t matter whether we enter 

w_d = 0.286, w_e = 0.714 

after doing that calculation above, or

w_d = 0.4, w_e = 1 

As long as the d/e ratio is 0.4, we can use 4 and 10. Or 40 and 100. 2 and 5. Or whatever two numbers has that ratio–the most obvious of which is of course 0.4 and 1. So whatever debt/equity ratio is given, just enter that ratio for w_d, and 1 for w_e. Easier, yes?

And of course, here’s the way we do weighted average in HP12c:

1. Clear the statistics registers: f – CLEAR – ∑
2. <Enter value> – Enter – <Enter weight> - ∑+ (an easy way to remember to enter value before weight, is to remember that v comes before w in the alphabet)
3. Repeat step 2 as many times as necessary
4. Display the result: g – 6 (that is, g, and then number 6 key–that’ll give you the weighted average.)

The big problem is that FRA is not like Quants or Econs, whose concepts you can wrap your head around. Instead, FRA, at least to me, is very much like a bunch of arbitrary rules that I just have to memorize blindly. 

Well, I hope you’re finding it easier than I am. If you’re struggling as well though, here’s something that may help: 

The Merrill Lynch Guide to Understanding Financial Reports (PDF)

Quote:

“This Guide to Understanding Financial Reports is an initiative by Merrill Lynch and its communications partner, Addison, to provide a clear, practical explanation on how to read and interpret a corporate report. We encourage you to use this resource to help you play a more active and informed role in working with your Financial Advisor—and ultimately gain better control of your investment activities.”

They really try to walk you through the basics there. I find this document very useful in just understanding the high-level concepts first, before delving further into the level of details presented in the CFAI and Schweser texts. 

Hope someone will find this document to be as useful as it is for me.

We don’t know the result of the December 2008 exam yet, but the passing rate for the June 2008 exam is a mere 35%. Daunting indeed! 

I was actually very excited when I found out about this passing rate. I was always one of the very top students in class, from elementary all the way to university. I loved the feeling of studying, understanding, and then acing a test or an exam. Since my graduation, I haven’t tested myself against a challenging test like this again, and I thought it’d be fun to do this like the old times, and ace the exam as always. 

So when I got the thick CFAI books (they weigh at 8 kgs–roughly 17.6lbs):

1. I immediately set up a plan to study those books. 
2. I even thought at that time that using commercially available study notes like Schweser was surely something that only a lazy bum would do. Smart, diligent people would surely read through the CFAI books and produce their own study notes!
3. I planned to go through the CFAI books in the order that I thought would give me the biggest bang for the buck.

I was very much looking forward to my study sessions! 

In the 3 months that followed, I read, and read, and read, and read the CFAI books. I updated the plan and created study notes. I started a Google group for CFA email study group. I hung around analystforum.com a lot. On top of that, I continued researching and reading more about the exam itself.

What 3 Months Have Taught Me

If I could go back 3 months and redo this all over again, would I?

Definitely not.

Because within this 3 months I learned quite a bit of things:

1. It’s not rocket science. The material itself is OK, even if you don’t have a finance background (I don’t). Sure, it can be quite hairy sometimes, but it ain’t rocket science. As long as you spend time to read and understand it, there shouldn’t be any problem with understanding. 
2. But there is a LOT of material to cover. Ha ha, oh, big surprise, right? Well the 3 months just made me realize how much was really there. You need to dig into each topic deep enough to be able to answer questions, which is OK, but here’s the main challenge: you need to maintain that depth for every topic for months, at least until the exam is over.
3. You WILL forget more than a few details in just a few weeks if you don’t keep revisiting the material. I really spent a lot of time reading up on quants. By the time I finished reading fixed income, I didn’t even remember what platykurtic was. And don’t even start talking about Ethics! 
4. The best-laid study plan will go awry. No matter how good a study plan sounds in the beginning, if you’re a married 30-something with a fulltime job like mine, trust me, there’ll be many occasions where you wouldn’t be able to stick to the plan.
5. Forget study notes. Creating your own study notes is actually very time-consuming, and worse, you don’t really know what you need to know and what you don’t need to know. You can follow the LOS, but the LOS can be quite broad sometimes. Schweser does a lot better job at this than one man doing this part time ever will.
6. Practice with lots of questions. You can only truly know what you don’t know by answering questions. Lots of questions. Breezing through bank discount yield, HPY, EAY, and money-market yield is easy. They are easy to understand. Having the definitions stored in your head so you can answer questions about them is a different thing. This is an exam. The best way to prepare is by taking lots of practice exams.
7. If you’re like me, you need study notes and practice questions. For the longest time I resisted even the idea of buying any kind of study notes and practice questions. After burning a few weekends studying, though, it dawned on me that paying around a thousand dollars to make sure that I don’t have to do this again is very much WORTH IT. The hours spent to repeat this the second time, the hours I’ll never get back, the hours I can use to research more investments and running my business, are worth much, much more than just a thousand dollars.

New Strategy: 140 Days To Go

So. with 140 days to go, I’ve only covered Quants, Ethics, Fixed Income, and half of Derivatives, and I’m changing my strategy:  

1. I’ve stopped updating my Study Notes. Sorry guys. I enjoyed writing down these notes, but it’s just not the right strategy for something like this. The majority of the time should be spent working on practice problems, not writing notes.
2. I’ve stopped planning using the waterfall model, and have switched to iterative model now. No more extended review at the end of a reading. Read everything, and reread again near to the exam. Read everything first once is my top priority now.
3. For reading, I’ll use the Schweser study notes. Have you seen how thin those Schweser notes are? We’re racing against time here. We can always go back to reading CFAI books after passing the exam.
4. I’ll use CFAI books only for: (a) the chapter summaries, (b) the exercise problems, and (c) further research in areas where the Schweser’s explanations aren’t clear enough. 
5. I’ve started doing practice questions everyday to cover areas that I have covered so far. This is mainly to help with retention–I don’t want to forget kurtosis again until July 2009

I will revisit this strategy again in March 2009. 140 Days To Go!!!

If you see the examples in Study Session 2 of the Schweser Notes, it’s full of sentences such as “On the TI, enter…”

Darn RPN haters. Sigh.

Calculating EAR by following the formula

Anyway, today I’d like to share a shortcut that I had learned before encountering the Schweser examples on computing the Effective Annual Rate (EAR). The concept itself is quite straightforward: if a quoted annual rate of X% is compounded more than once annually–let’s say quarterly–then the effective annual rate is actually higher than X%.

The formula given is:

EAR = (1 + periodic rate)^m – 1

So in one Schweser example, where the stated annual rate is 12% and it’s compounded quarterly, it goes like this:

1. Compounding period is 4, so periodic rate is 12%/4 = 3%.
2. Realize that 3% = 0.03, so to calculate the EAR following the standard formula, in HP12c we should type this:
   

   1.03 [ENTER] 4 [y^x] 

3. Which, on default settings in HP12c, gives the result of 1.13, since by default the calculator displays to two decimal places.
4. Then we need to remember to subtract 1 from it, and realize that 0.13 is 13%, which is the effective annual rate. 
5. Except we realize that the answer given in that Schweser example is 12.55%, which is pretty bloody different from 13%.

So troublesome. Here’s a much faster and straightforward way to do it in HP12c–I suspect you can do it on TI BAII as well (note the slash “/” is used to represent the division key):

12 [ENTER] 4 [n] [/] [i] [CHS] [PMT] [FV]

Which I’m happy to report displays exactly 12.55.

Why does this work?

Let’s think for a while why this works. Here, instead of manually converting figures in percent to decimal, adding 1, raising to the m^th power, subtracting 1, and converting it back to percent, we’re turning this into a simple TMV calculation.

That is, when we type in:

12 [ENTER] 4 [n] [/] [i] [CHS] [PMT] [FV]

we’re doing these steps (see the picture below, too):

• setting 4 as compounding periods (n)
• setting 3% as the periodic rate (i)
• -3 as periodic payment (negative means money that is paid out by us).  
• calculating the Future Value (FV), which turns out to be the EAR.

So… why does this work? This works because this is the exact calculation that happens when we limit our calculation just to the interests alone, taking the original present value (assumed at $100 in this shortcut–remember that 3% out of 100 is 3 dollars) out of the calculation. 

That is, this calculation answers the following question: “Let’s say I put in $100 now. From now onwards, every 3 months, the bank is going to pay me 3% interest on the principal, which will be added back to the principal. At the end of 1 year, how much interest will the bank have paid me?”

The answer is $12.55, which, for a principal of $100, means an effective annual rate of 12.55%.

Also, I’ve created a Google group for our email study group for June 2009 Level 1 exam. Please feel free to email me for membership by clicking this link! See you there!