CFA Level 1 Review: Balance Sheet



Study Session 9 is really your first look into the detail in the financial statements. There are four readings, covering inventories, income taxes, non-current liabilities and non-current assets. The material may seem a little boring at times and is largely a review of accounting issues. Resist the urge to just go through the motions and memorize enough to pass the test on these topics, here and in the other readings on the financial statement accounts. Learning the intricacies within the individual line items in the financial statements is your life as an analyst and really separates the good from the great.

It may be easy to fall into a trance-like state while reading through the material. You really need to stop every once in a while to think back on what you’ve read and review the important points.

Inventories

The material revolves around the choices for inventory accounting (FIFO, LIFO, Weighted Average, and Specific ID). You absolutely must know the FIFO AND LIFO concepts as well as how the choice affects ratios and the income statement. You will need this going into the CFA level 2 exam so don’t ignore it.

FIFO expenses the first items purchased for cost of goods sold, which are usually cheaper given inflation. This will lead to higher earnings from the lower expense. Ending inventory, working capital, shareholders’ equity, earnings, current ratio, ROA, ROE and the profit margin are usually higher using FIFO accounting. The advantage of FIFO is that the ending inventory will represent current replacement costs.

LIFO expenses newer inventory first so ending inventory will usually be lower in an environment of increasing prices. Understand what happens in an inventory liquidation and what it means for taxes, cash flow and earnings. After-tax cash flow, debt-to-equity, and asset turnover are usually higher under LIFO accounting. The advantage of LIFO is that it better matches current costs in goods sold with revenues.

The weighted average costing method is fairly straight forward and just the total cost of units available for sale divided by the total number of units available for sale in the period. It is not quite as commonly used and the Institute does not spend nearly as much time on it as the other two methods. The advantage of average costing is that it smoothes any price changes.

Understand how to convert LIFO to FIFO statements. Add the ending LIFO reserve to inventory. Subtract the change in LIFO reserve from the COGS for FIFO cost of goods sold. Adjust the LIFO net profit by the change in LIFO reserve and the tax rate for the FIFO net profit.

For the exam, you need to understand how the inventory costing methods result in different valuations in other accounts (i.e. gross/operating/net profits, ending inventory, cost of goods, taxes). The table below shows the costing method affects in a (normal) rising price environment. You may be asked how this would differ when prices are falling which would mean that the opposite would happen. More important that memorizing the table is understanding what is happening.

A table with LIFO and FIFO across the top and all the relevant ratios/financial statement line items down the side makes it easier to see how the two methods can cause differences in your analysis. Rather than just writing higher or lower, understand why the effect happens (i.e. shareholders’ equity is usually higher with FIFO because earnings and inventories are higher).

Long-lived Assets

Much of the reading revolves around the capitalizing/expensing debate. Understand the rules for capitalizing and how/why managers might want to bend them.

On acquisition, all tangible assets (physical assets) are recorded at cost on the balance sheet. This is capitalization because the company creates a capital asset that will be used in the business. It appears as an increase in the asset and shareholder’s equity (balance sheet) and a cash outflow in investing (Statement Cash Flows). The company will then depreciate the value of the asset by expensing a certain amount on the income statement each quarter and increasing the accumulated depreciation account on the balance sheet.

The company may also choose to expense an asset if its usefulness is used entirely in the current period. This means no change on the balance sheet and higher expenses on the income statement. Since this results in lower net income (in the current period) and lower assets, management may choose to capitalize an asset when it can.

Your job as an analyst will be to decide if the decision was appropriate and adjust the financial statements if necessary. The material on the adjustments is important and you should remember how to adjust the interest coverage ratio (add depreciation expense to EBIT and the capitalized interest to interest expense) and the net profit margin.

You may also want to adjust the statements for capitalized interest by: add capitalized interest back to interest expense, reclassify capitalized interest from investing to operations on the cash flow statement, remove capitalized interest from depreciation expense.

Understand how the financial statement accounts and ratios differ under capitalizing or expensing. A table makes it easy to remember with capitalization on one side and expensing on the other. Return on equity, ROA, profit margin, pretax cash from operations, earnings, and shareholders’ equity will be higher under capitalization. Cash from investing, asset turnover, and debt-to-equity will be higher under expensing.

Remember the difference and how to calculate the methods of depreciation: straight-line, accelerated, and units-of-production and be able to estimate the age of fixed assets.

Straight-line depreciation is relatively easy and just the original cost minus salvage value, divided by useful life. The biggest hurdle is remembering to reduce by salvage value because many candidates forget the step.

Accelerated depreciation for each year is = (2/asset life) multiplied by the year’s beginning book value of the asset. The method books higher depreciation expense earlier in the asset life.

Debt-to-equity and asset turnover will be higher under an accelerated method of depreciation while ROE, ROA, profit margin, shareholders’ equity, and earnings are higher under straight-line.

The units-of-production method is = (number of units produced/number of total units asset will produce over useful life) times the cost minus salvage value.

Intangible assets are those like patents and goodwill that do not have a physical nature. The most important material here is the difference between IFRS and GAAP in the recognization and accounting for intangible assets. There are separate rules for an internally-generated asset (i.e. through R&D) and an acquired asset. Again, a table with IFRS and GAAP next to each other makes it easiest to compare and remember the material.

Income Taxes

You will need to know the difference between accounting profit and taxable income and how to calculate deferred tax assets and liabilities. A deferred tax liability is taxes that will be paid in the future because the company reported lower taxable income than profits, while a DTA is taxes that will be saved in the future. The material can be a little confusing so you may need to spend a little extra time.

On these more difficult concepts, I like to look for a YouTube video that may help explain things. If you are a visual learner like me, it may help to see the material from a different perspective. Allen Mursau provides a good overview of deferred taxes at https://www.youtube.com/watch?v=45PARid_erY

Understand the concept behind temporary and permanent differences. Tax-exempt interest, allowable tax credits and life insurance premiums are the usual examples for permanent differences.

Be able to determine the income tax expense under the liability method: Taxes payable + change in DTL – Changes in DTA net of valuation allowance.

Non-Current Liabilities

You need to be able to work through the calculation for interest expense, coupon payment and the ending carrying value of a bond. It can be a pain at first isn’t too difficult once you understand what is happening.

The interest expense is just the ending carrying value times the market rate times ½ for semiannual bonds. Reduce this by the interest payment (face value * coupon rate*1/2) for the change in the liability. The prior ending carrying value plus the change in liability is your new carrying value.

Understand how a change in interest rates affects the market value of debt and economic gains. An increase in rates will decrease the value of debt and lead to an economic gain.

Remember the five main debt covenants: limitations on asset disposal, restrictions on debt issuance, limits on use of borrowed funds, collateral maintenance, and dividend restrictions.

Study session ten in the CFA Level 1 curriculum concludes the material on FSA with reporting quality and some applications.

‘til next time, happy studyin’
Joseph Hogue, CFA

CFA Level 1 Review: Cash Flows and Financial Analysis



We covered the first half of study session eight last week with a review of the Balance Sheet and Income Statement. We wrap up our review this week with the Statement of Cash Flows and Financial Analysis Techniques.

Cash Flows are an Analyst’s Best Friend

The Statement of Cash Flows is where you will likely spend much of your time in your first years as an analyst. This reconciliation of cash in and out of a business over a period can be constructed completely from the other two statements. It is also less easily manipulated than the income statement and provides a powerful check against aggressive accounting assumptions on the income statement.

There are two methods of constructing the Statement of Cash Flows, direct and indirect. While it may be tempting to pick one method of cash flow statement construction, you absolutely must know both methods. There is no better practice to understand how the company operates, i.e. how the company uses assets, liabilities and income to generate cash for equity holders. Knowing the power of cash flows over reported income will make you a superb analyst.

Cash versus Accrual Accounting

While the other two statements follow an accrual method of matching expenses and revenues made during the period, the Statement of Cash Flows shows the cash receipts and payments during the period. It is a reconciling statement in the company’s cash and cash equivalents during the period. Because it shows actual inflows and outflows, it is much more difficult to manipulate by management and widely used by analysts.

The general structure for the statement is that,

  • Change in Cash = Cash from operations (CFO) + Cash from Investing (CFI) + Cash from Financing (CFF) + any effects of exchange rates

There is a lot of material here but the first thing you need to master is distinguishing between a cash outflow and a cash inflow. It is all about whether an account is a source of cash or a use of cash. Once you’ve got that understood, everything else is intuitive and more easily understood.

Assets are sources of cash, if you see a decrease in an asset (on the balance sheet) that means the company converted that asset to cash, i.e. cash inflow.

Liabilities are a use of cash, a decrease in a liability account means the company used cash to pay for that decrease, i.e. cash outflow.

Cash Flow from Operations

Besides cash from sales of goods or services, an important part of CFO is the adjustments from items on the balance sheet and income statement. These adjustments happen because of the accounting difference between accrual-based and cash accounting.

  • Depreciation for assets, expensed on the income statement as a use of a capital asset, is not a use of cash so must be added back to net income. This account is extremely important for a lot of capital-intensive sectors like energy and real estate. The company’s continual investment in new equipment or depreciable assets will be an important check against depreciation.
  • Change in operating assets and liabilities that have already been accounted for on the balance sheet but had not yet settled in cash, i.e. accounts receivable, inventories, accounts payable, etc. This is the company’s ‘working capital’ and is important in analyzing the true efficiency of operations. These are all short-term assets and liabilities used in the day-to-day operation of the enterprise.
  • One confusing aspect of the statement is remembering how dividends and interest are shown. Dividends received and interest received and paid are shown as cash flow from operations, while dividends paid are shown as financing.

Cash Flow from Investing

While operating assets and liabilities, or working capital, is shown as cash flow from operations, cash flows for the purchase or sale of long-term assets is shown as investing. This makes intuitive sense if you think of these assets as an investment in long-term production. Items include fixed assets, long-term investments and business acquisitions or divestitures.

Cash Flow from Financing

Financing includes borrowing or repaying debt principal but not interest which is taken as a cost of operations and shown under CFO. Similarly, since equity capital (common and preferred stock) is raised as a financing vehicle, issuing or repurchasing shares and paying dividends is shown as CFF.

Converting the Statement to Direct Method

Most firms use the indirect method to prepare cash flows so the most common need is to convert the statement to the direct method. Firms reporting under the direct method must also present a reconciliation to the indirect method ( U.S. GAAP). The direct method details the firm’s operating cash receipts and payments from customers, suppliers, employees, etc. while removing a lot of the effects of accrual accounting. CFI and CFF are the same for both methods.

You must be able to arrive at CFO using the direct method.

The general formula for the direct method is:

Net Cash from Operations =
Cash Collected from Customers
- Cash paid to suppliers
- Cash paid to employees
- Cash paid for operating expenses
- Cash paid for interest
+ Cash received from dividends and interest

Start with Revenues
+/- change in unearned revenue
+/- Change in Accounts Receivable
= Cash collected from customers

Cost of goods sold
+/- change in inventory
+/- change in accounts payable
= Cash paid to suppliers

Salaries and wages expense
+/- change in wages payable
= Cash paid to employees

Other operating expenses
+/- change in prepaid expenses
+/- change in accrued liabilities
= Cash paid for other operating expenses

Interest expense
+/- change in interest payable
= Cash paid for interest

Dividend and interest income
+beginning interest receivable
- Ending interest receivable
= Cash received from dividends and interest

The Indirect Method

Since most statements use this method, you will not usually have to do the work but it is important to know how to put it together. The method starts with net income and adjusts for cash and non-cash items.

Net Income
+ Non-cash charges (depreciation, amortization, depletion expense)
+ increases in current operating liabilities
+ decreases in current operating assets
+ increases in deferred income tax liability
- increases in current operating assets
- decreases in current operating liabilities
- decreases in deferred tax liability

+ any losses on investing or financing activities (loss on sale or write-downs, loss on debt retirement)
- any gains on investing or financing activities

= Net cash from operations

Free Cash Flow

Free cash flow is an extremely important measurement and you will need it extensively in the equity section of the exam, especially at level II. It represents the cash available to either equity investors or all capital providers after all working capital and fixed capital needs have been accountable. Basically, it is the extra cash available to owners (of debt or equity) after the company’s future operations have been funded.

Free Cash Flow to the Firm (FCFF) is the cash flow available to all capital providers (debt and equity) and equals:

Net income + Net noncash Charges (depreciation and amortization) – Investment in working capital – Investment in Fixed capital + after tax interest expense

Free Cash Flow to Equity (FCFE) is the cash flow available to common shareholders and equals:

Net income + Net noncash Charges (depreciation and amortization) – Investment in working capital – Investment in Fixed +/- net borrowing

  • Notice that FCFE is FCFF except without adding back interest expense and taking net borrowing into account.
  • Understand how to arrive at FCFE or FCFF with CFO
  • FCFF = CFO + INT (1-t) – invest fixed capital
  • FCFE= CFO – invest fixed capital +/- net borrowing

There are a few performance and coverage ratios you should remember as well. Most are relatively simple, just the CFO over an account from one of the other statements. Remember that any account from the balance sheet must be averaged between the beginning and ending value since the balance sheet is a point-in-time estimate rather than activity over the period.

GAAP and IFRS Differences

The difference in cash flow reporting for GAAP and IFRS are extremely testable so you must remember them for the exam. The material is relatively brief and lends itself easily to a flash card.

Interest paid – can be classified as operating or financing cash flows in IFRS but only as operating cash flows under GAAP.

Interest and dividends received – can be classified as operating or investing cash flows under IFRS but only as operating cash flows under GAAP.

Dividends paid – can be classified as operating or financing cash flows under IFRS but only as financing cash flows under GAAP.

Companies reporting under IFRS need to separate their income tax account if possible under operating, investing or financing while all income taxes are reported under operating cash flows in GAAP.

The direct method is preferred under both IFRS and GAAP but the indirect method may also be used. Under GAAP, a company must also provide a reconciliation to the indirect method if the direct method is used in the statements.

Financial Analysis Techniques

The introductory material on ratios, common-size techniques, regression analysis and the use of graphs is probably secondary to actually understanding the formulas that follow and what they mean. Understand the basic concept behind the broad range of techniques and any advantages/limitations to each.

There are an immense number of formulas shown, I counted more than 50 in the FinQuiz study notes including multiple ways to get at the same idea. The likelihood of seeing any individual formula on the exam is relatively small so I would spend more time on the bigger picture and the three financial statements. Make a flash card for each formula and run through them until you are familiar with the concept and inputs to each formula. Once you’ve got a particular formula, put the card in your secondary pile which you may only need to review every month or so. This should be enough to reproduce it on the exam if needed.

Study Session 9 digs deeper into the balance sheet with readings on inventories, income taxes, and non-current assets and liabilities.

‘til next time, happy studyin’
Joseph Hogue, CFA

CFA Level 1 Review: Financial Statements



Study session eight in the curriculum is your first real look at the three financial statements and some techniques in analysis. I won’t say that the material absolutely must be a pleasure but this is going to be a big part of your job as an analyst. If you are not the slightest bit interested in dissecting the financial statements and analyzing what you find…you might want to consider another career path.

The study session is a long one and important enough to take a little extra time to work through. We’ll cover the first two readings this week and then finish up next week.

It’s hard to distinguish any significantly important material in the curriculum covering the financial statements because it is all extremely important.

  • Understand each individual line item that shows up on the statements,
  • which accounts can be manipulated by management and how,
  • how each account is valued,
  • which accounts are used in ratio and other financial analysis, and
  • how the three financial statements are related to each other.

Understanding Income Statements

The income statement measures the company’s performance over a period of time. The main point is that revenues and related expenses are matched during the period in which they occur, i.e. accrual accounting. This is supposed to give a better measure of performance than a cash accounting because cash does not always come in at the same time as the work is done. The problem is that management often has a strong incentive to manipulate the revenues, expenses and other items to show earnings in a different light.

It’s important to understand the basic structure of the statement and what each line item represents:

  • Net Sales is gross revenue minus any allowances for returns
  • Cost of goods sold is really what it sounds like and is the inventory cost, here it is important to understand inventory accounting procedures like LIFO, FIFO, or average cost to understand how management is expensing it
  • Gross Profit is the difference between net revenue and COGS (also used to find Gross Margin) and is your first measure of profitability
  • Selling, General & Administrative is all direct and indirect expenses that can be linked to operations (salaries, rent, utilities, marketing, pretty much everything that is not associated with the cost of inventory itself)
  • Operating income (profit) is the result of operations and your second measure of profitability. This is also sometimes referred to as EBIT or earnings before interest and taxes. (profit margin = operating income/ net revenue)
  • Interest expense is just the interest on debt for the period
  • Nonrecurring items- discussed below
  • Provision for income taxes represents the estimated tax liability and gives an indication of the effective tax rate
  • Net income is your final measure of profitability (net margin = net income/net revenue)

Firms with a controlling interest in a subsidiary will also report the amount of net income from the subsidiary on their own income statement. You will see much more detail on how and when this income is consolidated on the parent company’s statements in Level 2. For the first exam, just remember the basic definitions for minority interest and consolidation.

A theme throughout the curriculum is the preference for conservative accounting principles, as opposed to aggressive practices. Conservative principles are those that take the ‘safe’ bet when recognizing revenues or expenses (and usually less favorable to short-term reporting). The idea is that if management is taking a conservative approach on some accounting practices, they are less likely to be trying to manipulate the data to show the financials in a better light.

There is quite a bit of information on revenue recognition. Start with remembering the ‘criteria’ for recognizing different types of revenue and the ‘procedural steps’ for recognition. This kind of list material is easily testable.

Understand how to calculate the two methods for revenue recognition of long-term projects and the SEC’s four criteria for revenue recognition:

  • Legitimate arrangement between buyer and seller
  • Delivered or rendered the product or service
  • Price is or can be determined
  • The seller can be reasonably assured of collection

Revenue recognition for long-term contracts is particularly important for the idea of accrual accounting, i.e. matching revenue with appropriate expenses in the current period. Remember the steps to the different methods:

  • Percentage of completion
    • Percent complete = total costs to date/total expected costs
    • Recognizable revenue total = estimated total revenue * percent complete
    • Current period revenue = Recognizable revenue total – prior revenue recognized
  • When the expenses and sales for a project cannot be measured until completion, U.S. GAAP allows the completed-contract method. All billings and expenses are capitalized on the balance sheet until the project is completed then everything is moved to the income statement.
  • Percentage of completion method is more aggressive because revenues are booked immediately even if they will not actually be received until later. It is also subject to considerable assumptions and shows smoother earnings.

The material on LIFO and FIFO is extremely important and you will need this introductory knowledge for detailed analysis in the Level 2 exam.

  • FIFO expenses the oldest inventory on the income statement first (first-in, first out). This means that ending inventory (the materials still held for production after the current period) better matches current replacement costs.
  • LIFO expenses the newest inventory on the income statement first (last-in, first-out). The method is permitted under U.S. GAAP but not IFRS. It better matches current costs with revenues.
  • Weighted Average Costs is not used as much in the curriculum as LIFO or FIFO but you still need to know how it is calculated and how it relates to the other two methods.

** Understand the implication of these three costing methods on Net Income, Ending Inventory and Cost of Goods Sold in two scenarios (rising prices and falling prices).

  • FIFO reports the highest net income and ending inventory but the lowest cost of goods in an environment of rising prices. This is because older (cheaper) inventory is expensed first.
  • LIFO reports the highest net income and ending inventory but the lowest cost of goods in an environment of falling prices. This is because newer (cheaper) inventory is expensed first.
  • Weighted Average Cost always reports NI, EI and cost of goods in the middle of these two in both pricing environments

Depreciation is another topic where you will need to master the introductory information to do well on the Level 2 exam. The three methods are easily testable because they lend themselves well to quick calculations.

  • Straight line depreciation spreads the value out over the useful life = (cost – residual value)/useful life
  • Accelerated depreciation takes higher depreciation charge earlier in the equipment’s life = (2/remaining       useful life)*(cost – accumulated depreciation)
  • Units of production matches the depreciation with production

Nonrecurring items that are unusual or infrequent (but not both) are reported as part of earnings from continuing operations and are often a way for management to take large expenses up front instead of in the future. Examples are: restructuring costs, asset impairment charges, gains or losses on sale of long-lived assets.

Those nonrecurring items that are unusual and infrequent (extraordinary) or discontinued operations are reported net of taxes below income from continued operations. Because these are so out of the ordinary, analysts do not normally consider them against performance. As with those nonrecurring items included in continuing operations, analysts must decide whether they are appropriately reported.

Remember that some items are not reported on the income statement but go “direct to equity” as other comprehensive income. The easiest way to remember these is by the PUFE acronym for:

  • Pensions or additional minimum pension liability
  • Unrealized gains or losses on available for sale securities
  • Foreign currency exchange translations on hedging
  • Effective portion of cash flow hedges

You are not asked to do much with the Statement of Comprehensive Income at level I but just understand the basic relationship and what each of the four items represents.

Understand which changes to accounting standards must be reported retrospectively (changes to accounting principles) and which must be treated prospectively with no adjustments to prior periods (changes to estimates) and that corrections of prior period errors require a restatement of financial statements.

Be able to calculate earnings per share for both a simple (just NI minus preferred dividends over weighted average common shares) and complex capital structure (basic EPS adjusted for After-tax interest on convertible and common share adjustments for assumed conversions).

Understanding Balance Sheets

Unlike the other two statements, the balance sheet is a ‘snapshot’ in time. The figures reflect the state of accounts at that moment, the last day of the quarter or year. The other two statements represent activity over the period. For this reason, and this is very important, when you perform ratio analysis comparing numbers across the statements you will take an average of the beginning and ending figures for balance sheet accounts. For example, the cash debt coverage is cash-flow from operations divided by average total debt from beginning and ending balance sheet date.

You’re going to get tired of people saying, “Assets = Liabilities + Equities.” This is the basic balance sheet equation and around which much of the material will revolve around. Understand what it shows when you change around the equation (i.e. A-L = E) and you’ll get the importance of the concept.

Account Valuations

One of the most important topics on the statement is valuation. Some accounts are shown at historical or amortized price, while others are shown at fair (market) value. Obviously this makes a big difference in overall valuation and when comparing numbers. Further, analysts often will adjust the numbers to arrive at a number they feel is more realistic or comparable. You aren’t asked to do this but just to understand where it might be needed and why. The definitions below will each describe the method of valuation for the account.

Assets

Assets represent a future probable economic benefit and could be accumulated items, amounts spent but not yet expensed (matched with revenues) or amounts earned but not yet received (accounts receivable).

Current assets are the most liquid and are accumulated or planned to be used in the ‘current’ operating period. Normally recorded at fair market value.

Cash or cash equivalents- is usually short-term money market, CDs, commercial paper or treasuries that can be converted to cash quickly. This is used in all your liquidity ratios and is (duh) valued at market.

Accounts receivable- Sales made on credit but not collected, usually offset by an allowance for uncollectable (estimated) but shown net realizable (fair) value. Trends in AR are an important indication of performance and estimates.

Inventories- A key item and one you’ll spend a lot of time on through the curriculum. Reported at lower of cost or market on the balance sheet but estimated through different practices (LIFO, FIFO, or average). Could be broken down into three sub-accounts: raw materials, work-in-process, and finished goods.

Prepaid expenses- Where the company has paid in advance for a service or product, i.e. insurance and rent. Valued at market with an adjustment when they are expensed through the income statement.

Long-term assets have a useful life of more than a year (or operating cycle) and are usually not going to be sold to customers. These accounts are usually recorded at cost and then depreciated or amortized over the estimated life.

Property, Plant, & Equipment – valued at cost and depreciated over its estimated useful life, shown as net. These are also referred to as ‘tangible’ assets because they generally have physical substance and are easily counted.

Goodwill & other intangibles- Goodwill is the amount paid for acquisitions above their market value. It is basically a premium paid for things like brand and proprietary technology. It is recorded at cost and tested annually for impairment, which is an estimation of the value that no longer exists.

Liabilities

Liabilities are future probable sacrifices from obligations or transactions and could be: amounts received but not earned yet as revenue, amounts received that must be repaid or amounts expensed on the income statement but not yet paid (accounts payable, accruals, etc).

Current liabilities are those that will be paid or settled in the ‘current’ operating cycle.

Accounts Payable- suppliers have sold something to the company on credit that must be repaid. As with AR, you’ll look for trends in this to see that the company is not taking longer to pay. Valued at market.

Accrued liabilities- Those items expensed in the current period but that will not be paid until the next period, kind of a carry-over effect of timing, i.e. wages and interest owed but not paid yet. Valued at market.

Short-term debt- includes lines of credit and notes with an original maturity of less than a year (negotiated debt).

Current portion of long-term debt – principal portion of long-term notes including any capital lease obligations.

Unearned revenue- sales collected in advance but not yet earned so they sit here until delivered or performed. Settled as revenue on the income statement instead of through a cash adjustment.

Long-term liabilities is often a single line item for debt but can also be broken out into items like: bonds and notes payable, long-term lease obligations, deferred taxes and pension liabilities.

Stockholder’s Equity

Equity is the residual after assets and liabilities and that which is due the owners of the company. It includes: capital contributed by owners through stock, recognized on the income statement but not yet paid out to owners (retained earnings) and adjustments to assets or liabilities that did not go through the income statement (see other comprehensive income in prior post).

Contributed capital- is supplied by stockholders and broken into common, preferred and additional paid-in-capital.

Minority interest – This is the cumulative, noncontrolling ownership held in other companies.

Retained earnings- accumulated net income due to owners but not yet paid out.

Treasury stock – amount paid to repurchase company stock usually shown as a negative number because it decreases equity.

There differences between IFRS and U.S. GAAP are probably the most important here on the balance sheet and you should try to remember the list material for the exam. Make out a flash card for each line item where valuation or reporting differ between the two (Inventories, PP&E, Intangible assets, goodwill). Place U.S. GAAP standards on one half with IFRS next to it to quickly compare the differences.

The three types of financial assets (Held-to-Maturity, Held-for-Trading, Available-for-Sale) are important to understand. Remember the criteria for each, how it is valued on the balance sheet and how unrealized gains are reported.

Deferred tax assets and liabilities will also be a big section on the next exam but you only need the basic definition for the first exam.

That is a ton of information for a blog post and only the high-level stuff you need to know about financial statements. Take the extra time on these next few study sessions and master the material. We will wrap up SS8 next week with a review of the Statement of Cash Flows and an introduction to Financial Analysis Techniques.

‘til next time, happy studyin’
Joseph Hogue, CFA

Level 3 CFA Curriculum Changes 2015



 

The readings and Learning Outcome Statements (LOS) are out for the 2015 CFA curriculum and there have been some significant changes. Make sure you download the curriculum outline and new LOS from the CFA Institute website.

The most surprising change has been a modification of the topic area percentage weights on the exams. The previous topic weights had been the same for years, before I was a candidate, and no one really saw the changes coming. The actual changes are relatively marginal but still surprising. While new topic weights were given to many topics in the first two exams, it looks like the weights have been removed altogether from the Level 3 exam.

At first glance there appears to be huge changes to the Level 3 curriculum this year but closer inspection reveals less new information and a simple reshuffling of study sessions and readings. The Institute has changed study sessions around, condensing some and separating others.

Private Wealth Management has been separated into two study sessions. Economics and Capital Market Expectations were two study sessions last year but have been rolled up into SS7 this year. Asset Allocation has been separated into two study sessions, eight and nine, this year. Equity Portfolio Management has been condensed from two study sessions to just one. There are also readings that have been moved from one study session to another.

After all that, only one new reading has been added (asset allocation) and three readings have been removed (one in Ethics and two in Equity Investments).

The new (11th) edition of the Code and Standards is not materially different from the previous edition. Some of the standards have been modified to include a more proactive requirement, i.e. the need for supervisors to take positive steps to promote compliance rather than disciplinary action.

New readings:
(20) Market Indexes and Benchmarks

Dropped readings:
(3) Ethics in Practice(24) International Equity Benchmarks
(25) Corporate Performance, Governance and Business Ethics

The removal of topic weights from the exam is not necessarily a big change. Suggested topic weights for the Level 3 exam always had a large range and were not very useful anyway. Portfolio management, i.e. individual and institutional, are still going to be major sections and worth every minute of study time.

The Level 3 CFA exam is still all about the essay portion and the best way to approach it is still by going through old exams released by the Institute. The guideline answers to the essay exams reference a specific reading from the curriculum so make sure that reading is still included in the curriculum. We’ll cover several essay questions from prior exams in our review leading up to the 2015 exam.

‘til next time, happy studyin’
Joseph Hogue, CFA

Level 2 CFA Curriculum Changes 2015



The readings and Learning Outcome Statements (LOS) are out for the 2015 CFA curriculum and there have been some significant changes. Make sure you download the curriculum outline and new LOS from the CFA Institute website.

The most surprising change has been a modification of the topic area percentage weights on the exams. The previous topic weights had been the same for years, before I was a candidate, and no one really saw the changes coming. The actual changes are relatively marginal but still surprising.

Level 2 Changes

The topic weight for Ethics & Professional Standards has increased from a fixed 10% weight to a range of 10% to 15% on the exam. The range on Financial Reporting & Analysis has been tightened to 15% to 20% of your exam score, slightly decreasing its potential importance from a high of 25%. The importance of Equity Investments has also decreased with a new weighting range of 15% to 25%, from 20% to 30% previously. The range on Alternative Investments decreased to 5% to 10% (5% to 15% previously) while the range for Fixed Income Investments increased to 10% to 20% (from 5% to 15% previously).

There are six new readings to the Level 2 exam (two in FRA, one in Corporate Finance and three in Fixed Income) while 11 readings have been removed (two in Ethics, three in FRA, one in Alternative Assets and five in Fixed Income).

New Readings:

(19) Multinational Operations
(20) Evaluating Quality of Financial Reports
(25) Corporate Performance, Governance and Business Ethics
(42) Term Structure and Interest Rate Dynamics
(43) Arbitrage-Free Valuation Framework
(44) Valuation and Analysis: Bonds with Embedded Options
(46) Introduction to Asset-Backed Securities

Dropped Readings:
(3) CFA Institute Soft Dollar Standards
(10) Prudence in Perspective
(21) International Financial Statement Analysis
(22) The Lessons We Learn
(23) Evaluating Financial Reporting Quality
(43) Investing in Hedge Funds
(46) Term Structure and Volatility of Interest Rates
(47) Valuing Bonds with Embedded Options
(48) Mortgage-Backed Sector of the Bond Market
(49) Asset-Backed Sector of the Bond Market
(50) Valuing Mortgage-Backed and Asset-Backed Securities

The Ethics & Professional Standards topic has gotten a little easier with the removal of some supplementary readings. You still have the case studies but almost all the material is a repeat of what you saw at the Level 1 curriculum. The new edition of the Code and Standards is not materially different from the previous edition. Some of the standards have been modified to include a more proactive requirement, i.e. the need for supervisors to take positive steps to promote compliance rather than just prevention. The new chapter on ‘Ethics and the Investment Industry’ provides a strong argument for ethical conduct and integrity of the markets.

If you compare last year’s readings with the 2015 readings, you’ll notice that many have been changed rather than necessarily added or dropped entirely. This is good news for repeat candidates since it means that the LOS have not changed as dramatically as the readings. Of all the changes, I would probably pay the most attention to Fixed Income. The readings have been changed significantly and the topic weight on the exam has increased as well.

The common belief is that there is a higher chance of new material, i.e. new readings, appearing on the exams. I am not sure this is true or if it is even intentional by the Institute if it does happen. I would still recommend focusing on those topic areas with the most weighting whether they include new readings or not. The Level 2 CFA exam is all about the details and formulas. Where the Level 1 exam was about ‘why’ things are done, the Level 2 exam is about ‘how’ they are done so make sure you are able to work through formulas and processes.

‘til next time, happy studyin’
Joseph Hogue, CFA

Level 1 CFA Curriculum Changes 2015



The readings and Learning Outcome Statements (LOS) are out for the 2015 CFA curriculum and there have been some significant changes. We are covering the changes over the next three days. Make sure you down load the curriculum outline and new LOS from the CFA Institute website.

The most surprising change has been a modification of the topic area percentage weights on the exams. The previous topic weights had been the same for years, before I was a candidate, and no one really saw the changes coming. The actual changes are relatively marginal but still surprising.

Level 1 Changes

The weight to Corporate Finance decreased 1% to 7% of your Level 1 CFA exam score. Portfolio Management has increased in importance, rising from 5% to 7% of your score. Fixed Income has also decreased in importance, dropping 2% to 10% of your total score while Alternative Investments has picked up a percentage to become 4% of the exam.

A total of three readings have been added in Financial Reporting & Analysis, Fixed Income and Derivatives while the Ethical & Professional Standards have been updated to the 11th edition. Six readings have been removed, two in FRA and four in Derivatives.

New readings:
(33) Financial Reporting Quality
(54) Introduction to Asset-Backed Securities
(58) Basics of Derivatives Pricing and Valuation

Dropped readings:
(33) Financial Reporting Quality: Red Flags and Accounting Warning Signs
(34) Accounting Shenanigans on the Cash Flow Statement
(58) Forward Markets and Contracts
(59) Futures Markets and Contracts
(60) Option Markets and Contracts
(61) Swap Markets and Contracts

The new edition of the Code and Standards is not materially different from the previous edition. Some of the standards have been modified to include a more proactive requirement, i.e. the need for supervisors to take positive steps to promote compliance rather than just prevention. The new chapter on ‘Ethics and the Investment Industry’ provides a strong argument for ethical conduct and integrity of the markets. There are no new LOS for the topic area so nothing materially different.

There are 38 new LOS while 39 have been dropped and six amended. Most of the new or removed LOS have to do with new or removed readings, so fairly easy to spot. New LOS have been added to Economics, FRA, Corporate Finance, Fixed Income and Derivatives. LOS have been removed from FRA, Corporate Finance and Derivatives.

Derivatives looks to have become less detailed which will be a welcome change for many candidates. Often material is not dropped entirely but just moved to another exam so watch for changes to the Level 2 exam.

The common belief is that there is a higher chance of new material, i.e. new readings, appearing on the exams. I am not sure this is true or if it is even intentional by the Institute if it does happen. I would still recommend focusing on those topic areas with the most weighting whether they include new readings or not. The Level 1 CFA exam is all about broad understanding, so make sure you have a basic understanding of the why throughout the readings, new or otherwise.

‘til next time, happy studyin’
Joseph Hogue, CFA

CFA Level 1 Review: FRA and the Most Important Topic Area



Study session seven in the CFA Level 1 curriculum begins your study into Financial Reporting & Analysis, arguably the most important topic across the curriculum and your career. The session includes three readings covering an introduction, the mechanics of FRA and the two international accounting standards. It is all basic material and probably repeat for those with a finance background.

Financial Statement Analysis

This is really basic material and fairly intuitive. If you’ve got a background in finance, I would skim it while checking off the Learning Outcome Statements to make sure you have the general idea. There’s no calculations and you’re more likely to get questions from other sections of FRA.

Understand why different entities may have different uses for the statements; i.e. creditors, analysts and investors.

The balance sheet is a point in time measure of the firms assets, liabilities and equity capital. The numbers presented are as of a certain date. This is important because the other statements are presented for activity in the period. For many of the ratios, you will be using an average of the beginning and ending value to get a better representation of the account over the period. Another important thing to remember is that values on the balance sheet do not necessarily reflect fair market value. You will spend a lot of time learning how each line item is recorded and held on the books.

The income statement is a report of the firm’s operations over the period. How many sales they recorded and what it cost to make those sales. The most important thing to remember here is that sales do not mean cash flow. Understand the concept of the accrual method of accounting and how revenues and expenses are matched.

The statement of cash flows is a reconciliation of the other two accounts and reports how the firm’s cash changed over the period. You will be shown how to construct the statement two different ways, direct and indirect. Resist the temptation to just learn one way and hope that you don’t need to use the other. Understanding how cash payments and receipts are reported is one of the best ways to understand the company and will pay off big time in your analysis.

Beyond the three statements, the curriculum constantly emphasizes the importance of the Notes and Supplementary Information. The real detail in a company’s statements are buried within the notes so understand that you need to check there throughout your analysis. The curriculum spends some time on Other Comprehensive Income but only the basic need behind the statement.

Understand what an audit is and what kind of internal controls the company has, i.e. an independent board that is available to the auditors. Remember the basic language given in the four types of auditor reports:

  • Unqualified opinion – the most common and indicates no material misstatements and in accordance with GAAP.
  • Qualified opinion – some exceptions or limitations to accounting standards, possibly concerns to assumptions or valuations of certain items.
  • Adverse opinion – Not presented fairly or are materially misstated or not in accordance with GAAP
  • Disclaimer of opinion – the auditor is unable to issue an opinion

Understand that there are also other sources of information including: interim reports, proxy statements, the company’s website and press releases.

Financial Reporting Mechanics

The reading covers the standard conventions for developing the financial statements and is a great primer for deeper study. If you do not have a background in accounting or finance, this reading is a lifesaver because it will help get you up to speed.

The balance sheet is broken into current and non-current assets, current and non-current liabilities, and stockholder’s equity. Assets, whether current or not, are the resources the company uses in its operations. Current assets are those that the company plans to use or convert to cash within a year. Long-term assets are longer-lived and include PP&E, intangible assets and goodwill.

Liabilities are creditors’ claims on assets, and are drawn against assets to find the amount left to the owners. The curriculum does not spend quite as much time with Owner’s Equity. Just remember that it is contributed capital plus retained earnings and understand the basics behind the accounts.

Understand the difference between operating, investing and financing activities. This is the key to analyzing how the business works. Operating activities are the core business including sales and how those sales are made. Investing activities relate to the acquisition of long-term assets and investments and help to generate more operations in the future. Financing activities relate to the firm’s capital transactions involving equity or debt.

As part of learning the cash flow statement, remember the difference between a source of cash and a use of cash, and how it relates to the other statements. An increase in liabilities or equity or a decrease in assets is a source of cash because either an asset is being converted to cash or a liab/equity is being accrued in exchange for cash now. On the other hand, an increase in assets or a decrease in liab/equity is a use of cash. Buying an asset or paying off a liability/equity account decreases cash.

The Accounting Process is about a year’s worth of accounting classes packed into one reading. It is general information and you shouldn’t have too much trouble understanding it. While important, it’s secondary to the financial statement material.

The section on Accruals and Valuation Adjustments is very important and core to your job. As an analyst, you need to see through the ways management adjust accounts and be able to arrive at a fair value. Understand unearned (deferred) revenue and prepaid expenses and the assumptions/adjustments made for both in the income statement.

Lastly, understand how the three statements are related. The income statement flows through to the balance sheet through retained earnings. The cash flow statement relates to the balance sheet through change in cash. Additionally, there are many accounts that are linked (i.e. depreciation, working capital).

Financial Reporting Standards

While you will need to understand how the statements are reported differently under IFRS and GAAP, a lot of this background information is secondary to the mechanics. Understand the relationship between each framework and the private sector organizations that establish rules (FASB and IASB) and the difference in framework between IFRS and GAAP.

Knowing some of the forms will be necessary in your professional life, even if you don’t see a specific question on the exam. 10-K is the annual report to the SEC while 10-Q is a quarterly report. Material events outside of the quarterly or annual reports are required in an 8-K form. Forms 3, 4 and 5 are required to report changes in ownership.

Remember, IFRS does not permit LIFO as an inventory costing method and uses a single-step method for impairment rather than the two-step method used in GAAP. IFRS also requires capitalization of development costs when certain criteria are met.

An important difference between GAAP and IFRS is the difference between a principles-based method, providing a broad reporting framework and more judgment, and a rules-based method which provides specific rules for each transaction and requires less judgment.

Study session eight gives you your first glimpse into the financial statements and is extremely important. Be ready to spend a lot of time and master the material or you will not only have problems on the first exam, will need to relearn the material for the other two exams.

‘til next time, happy studyin’
Joseph Hogue, CFA


CFA Level 1 Review: Quant Methods, Building Blocks going Forward



This week we begin our review of some of the most important topic areas for the Level 1 exam. We may not cover every study session before the December exam but we will hit the most important areas and try to make sure you get all the points possible.

You’ll notice that we are skipping over one of the most important topic areas in the exam, Ethics and Professional Standards. If you’ve been following the blog, you know how important this topic is but also that it does not change much from year to year. We’ve covered the Ethics section several times and you can find the most recent post by clicking here. Remember, don’t just read through the material on Ethics and the Standards. You really need to be practicing those end-of-chapter and test bank problems to get a feel for how it will be tested on the exam.

Quantitative Methods: Lower points but absolutely essential

The Quant Methods topic area may represent one of the secondary topics by points on the first exam, only accounting for 12% of your total score, but the material is absolutely critical to your success across the exams and as a professional. You may be able to get through the exams and your career with just a basic understanding of other topics (i.e. derivatives) but try being an analyst without mastering discounted cash flows and statistical concepts and it will be a short career.

Unfortunately, the section is avoided by many candidates. As someone who never really liked math in school, I can relate to the desire to avoid quant methods. Realize as I did though, you are in an analytical field and you need to embrace mathematics. Trust me, math can actually be enjoyable and you can learn to love it. Spend a little time and you will be amazed at how quickly you start understanding more complex concepts. A little effort to break an old perspective will go a long way and will help you immensely.

Quant methods are covered in two study sessions in the Level 1 exam, Basic Concepts and Application, with four readings in each study session. The first study session will be repeat material for anyone with an educational background in finance and should be fairly easy to understand for just about anyone else. Study Session 3 is a little more difficult but still manageable. Of the readings, I would say all but technical analysis are equally important and testable. Ideas like time value of money, probability and quant testing are fundamental to the curriculum and you’ll need to be able to do the math in just about every other topic area.

Make sure you have a basic understanding of technical analysis but it is probably the least important. The Institute has never really put much faith in technical analysis so you will likely only see basic questions on the exam, if at all.

Time Value of Money

The most important thing here is be able to use your calculator to solve for any one of the missing variables. Note that the Institute usually keeps problems within the realm of possible reality so if you get an answer that seems extremely high or low then you need to go back through the calculation to make sure you did it correctly.

Make sure you divide the annual rate by the number of times it is compounded within your formula. (i.e. $100 at 8% compounded quarterly for two years = $100 (1.02)8 is different than simply $100 (1.08)2

Most calculators calculate cash flows as an ordinary annuity, where payments come at the end of the period. Make sure you set the “begin” key for any annuity due problems where payments come at the beginning of the period. Also, remember that the payment and present value inputs will have opposite signs (i.e. since the payment represents an outflow use a negative sign).

**Important** Get in the habit of clearing out your calculator before or after you work a problem. It is as easy as two quick keystrokes (2nd and Clr Wk) and can save you points on the test.

The future value of cash flows is
FVN=PV(1+r)N

i.e. if your savings account earns interest at a 5% rate and you have $100 deposited, how much will it be worth in 20 years?

FV20=$100(1+.05)20
=$265.33

This is a fairly basic calculation with no payments and you’re more likely to see something more difficult on the exam. It is relatively easy to work through but learn to do it on your time value buttons,

PV = 100
I/Y = 5
PMT = 0
N = 20
CPT –>FV

Whether you input the present value as a negative or not doesn’t matter much here since there are no payments. For other problems, just remember that outflows (deposits and payments into an investment or account) should be negative while inflows (money you receive or value) should be positive. One of the cash flows must be negative (outflow).

The future value of a series of cash flows is only slightly more difficult but easily understandable if you think of each payment as a single future value calculation. Don’t forget the note on changing your calculator for an annuity due.

Example: The same savings account as above has $100 deposited but you plan on depositing an additional $100 per year at the end of the year. What will the balance be at the end of 20 years?

PV= -100
PMT = -100
N = 20
I/Y = 5
CPT–>FV
FV = $3,333

Make sure you understand how to solve for each variable in the equation when given the other variables.

Note: I set my calculator to four decimal places which is usually more than you will need for the exam.

Discounted Cash Flow

This is arguably the most important reading in the study session and you will see the concepts across all three exams.The first section covers NPV and IRR which are really two sides of the same coin. NPV is the value today of the series of cash flows at a discount rate. IRR is the discount rate at which NPV is zero. Either one can be used in a budgeting decision. As with much of the material, understand the situations where each is more appropriate and the strengths/weaknesses of each concept.

Both NPV and IRR are found easily with the calculator. Remember that a key assumption of IRR is that cash flows are reinvested at the rate, which may not be realistic. Also, if there are multiple cash outflows, there will be multiple IRRs or none at all. There may be a conflict between NPV and IRR when projects are mutually exclusive or when there are multiple cash outflows. In this case, NPV is preferred.

Using the calculator is relatively easy,
The initial project cost or investment is a negative (outflow) as CF0
CO1 through x are the stream of cash flows and entered as a positive (inflow)
If cash flows are an equal amount, you can enter them as F (frequency)
Press the NPV button and enter the interest rate
Down arrow
CPT–> NPV
For IRR, just press the IRR button and CPT

Time-weighted returns measure the rate of growth over a defined period between cash flows. It should be used when the portfolio manager does not control cash in and out of the account (as is usually the case). Money-weighted returns can be done easily using the cash flow function on your calculator but may not be as applicable unless you have discretion on cash flows.

Know the difference and how to calculate the material in money market yields section (i.e. money market yield, bond equivalent yield, and HPY). These are good formulas for flash cards if you’re having problems.

Statistical Concepts and Market Returns

As with much of the quant methods material, you should start with an understanding of the basic concepts before worrying too much about the different variations. It is much more important to master the concept of standard deviation than to work through the material too quickly trying to get a vague idea of everything.

Geometric and Arithemetic averages are important. The arithmetic mean is simply the sum of observations divided by the number of observances while the geometric mean is the compound return by taking the nth root of the product.

The material on measures of dispersion is extremely important and will feed into the concept of risk. Even though you will be able to calculate variance and standard deviation on your calculator, spend the time to learn the formulas.

The Sharpe ratio is a key concept throughout the curriculum and you need to understand what it means as well as how to calculate it. It measures the excess return on an investment or portfolio and can be used to rank opportunities. You will use iterations of this formula in many other concepts (i.e. Roy’s Safety First). The drawback is that, since it uses standard deviation as a measure of risk, it is most applicable for symmetric distributions and may overstate risk-adjusted performance.

Understand that the mean, median and mode are the same in a normal distribution but different with skewness. Don’t worry too much about calculating kurtosis or skewness, just understand the their implication. (i.e. how it affects dispersion and returns)

Probability Concepts

The most important material here is covariance, correlation and being able to do the calculations for expected value, variance and standard deviation for a two-asset portfolio. The formulas can get kind of long but they are pretty basic. This is the material that will be used most through the other levels of the exams as well.

Remember, the expected return is just the weights of each asset times their respective expected returns.

Correlation between two assets is the covariance divided by the product of the two standard deviations.
Correlation = COV(X,Y) / STDev (x) STDev (y)

Correlation ranges from -1 (perfect negative relationship) and +1 (perfect positive relationship).

Common Probability Distributions

Most of the introductory material here is fairly unimportant as it isn’t used much in other parts of the curriculum. The binomial distribution is a little more important because it relates to some of the derivatives material. The normal distribution is really where you want to spend your time.

Remember that 90% of the distribution will be between 1.65 standard deviations, 95% within 1.96 deviations and 99% within 2.58 deviations. You will be given a z-table but need to know the formula and the applicable number of standard deviations. You need to pay attention to the question and look for which part of the curve you are being asked to measure. Do you need an interval around the mean or just one side? All the stuff around the z-score (the formula and finding probabilities) is fairly basic so spend some time and master it.

The information covering Monte Carlo simulations is important but just definitional and advantages/disadvantages against other analytical methods.

Sampling and Estimation

Again, fairly unimportant material but it is mostly conceptual so it should be easier to remember. You won’t need much in the way of formulas but will want to understand the ideas and differences between the different sampling plans. Remember that a good estimator is unbiased, efficient and consistent.

  • Understand the difference between simple random, systematic and stratified sampling as well as advantages/disadvantages around each.
  • A carryover from the previous reading, be able to calculate and interpret confidence intervals for the different distributions. Remember, if the sample size is larger than 30 then the z-score can be used as a proxy for the t-score.
  • Probably the most important material in the reading is that on data mining, sample selection, survivorship, look-ahead and time-period biases. Understand these and the different situations in which they might occur.

Hypothesis Testing

  • Understand the difference between the null and alternative hypothesis and be able to calculate the test statistic. The p-value is the lowest level of significance at which the null hypothesis is rejected.
  • Understand the difference between a Type I and Type II error
    • Type I is where you reject the true null hypothesis (i.e. saying that the statistic falls outside of the confidence interval in a normal distribution when it does not)
    • Type II is where you do not reject a false null hypothesis (i.e. saying that the statistic lies within the confidence interval when it does not)
    • Remember the rules for setting a low or high level of significance (1% or 10%) depending on the penalty for committing either error (i.e. 1% significance if you do not want to make Type I error, 10% significance if you do not want to make Type II error)

Technical Analysis

Again, not as important as the other readings but make sure you have a basic understanding in case you see something on the exam. Understand the assumptions, especially how they relate to the theory of efficient markets, and the comparison to fundamental analysis. It does look like the Institute is putting in more charting information in the curriculum so understand the basic definitional ideas around the vocabulary (i.e. head and shoulders, double tops, neckline, etc.)

Understand what volume says about technical analysis, i.e. intensity of confidence in an up or down move.

The technical indicators are of relatively more importance than the material on charting. Understand the concept behind the price-based indicators, momentum oscillators, sentiment and flow-of-funds indicators and whether an indicator is giving a bullish or bearish signal.

That is a lot to take in for one week so you will probably want to cover one study session per week. It is pretty basic stuff if you have at least an understanding of basic statistics and algebra. We’ll start on the Financial Reporting material next week.

‘til next time, happy studyin’
Joseph Hogue, CFA

December CFA Exam Must-Know Strategy



Following our discussion last week on taking the December and June exams, we thought it would be a good time to start a series of posts to prepare December candidates for the exam. This week we will cover the basic strategy and helpful tips for the first CFA exam. Over the next couple of months, we will cover specific topic-level information within the first exam.

Follow those topic weights

The CFA Institute does not disclose the minimum passing score on any exam but has said that no one with a score of 70% or greater has ever failed. The Institute does release a topic-level breakdown of the question weights you will see on the exam, shown in the graphic below. While you cannot afford to neglect any particular topic, one of the best things you can do while studying is focus on the high-point areas on each exam.

It will do you no good to spend half your time studying Corporate Finance, even if that is what it takes to master the information, if it means performing poorly in other areas.

cfa topic weights

Looking at the chart, it should be clear that you need to focus on three or four topic areas for the first exam.

You absolutely must master the material in Ethical and Professional Standards. Not only is it carry the second most questions on the exam but it will be 10% of your next two exams as well. You’ll see additional material in the other two exams but the Code and Standards do not change so learn them early. The most challenging aspect for most candidates is that they underestimate the difficulty of the exam questions. Candidates reason that they are more or less honest people and so will intuitively know the answers to the ethics questions.

WRONG! You only need to read through a few of the end-of-chapter questions in the curriculum to see how difficult and confusing the Institute can make these questions. My suggestion, make flashcards for each professional standard for quick review. Then spend most of your time practicing questions. The best resource will be your curriculum book or those from prior years. Try getting the book from last year or the year before for another set of questions. Test bank questions are also a good resource. By practicing as many questions as possible, you will start to get a feel for how they might appear on the actual exam.

Financial Reporting & Analysis is likely the most important topic area in the curriculum across all three exams. You are testing for the designation of Chartered Financial Analyst, so you better master the topic to pass the exams and succeed in your career. There are four study sessions covering FRA for the first exam. I would say SS8, the material on the financial statements, is probably the most important.

A few keys to passing the FRA material

  • Understand how items are recorded on the financial statements – Are they historical costs or market values, are they point-in-time values or for the entire period
  • Understand the relationships between the financial statements – These are absolutely critical to your success as an analyst. Building your first proforma model will mean linking the three financial statements to your projections flow through and tell you where the company is going.
  • Understand how to adjust and analyze the financial statements through ratios, earnings quality and backing out different items. This is really the Holy Grail of the analyst’s job and you won’t be expected to do it on your first CFA exam but you will be expected to understand the very basics.

We’ll cover FRA in more detail through our topic-level breakdowns. Just remember to leave yourself plenty of study time for the topic when you are planning your schedule.

The time you spend on Quantitative Methods will depend on your prior experience with statistics. While the points in the topic are not huge over the first two exams, understanding the Level 1 material can make the material on the second exam much easier. For this reason, I would suggest spending a little more time to get it down. Study Session 2 is relatively basic material but absolutely fundamental to our industry so you need to understand it.

While Equity Investments is only 10% of your first exam, I would recommend spending more time here as well because it will save you a lot of time on the next exam. Study Session 14 is the more important but SS13 is relatively basic and should be easy enough to get the general ideas. In particular, the material on Industry and Company Analysis (reading 50) and Equity Valuation (reading 51) are extremely important and very testable.

If you do not have a background in debt instruments, you’ll need to spend a little extra time in Fixed Income as well even if it is not a lot of points on the first exam. The basics on pricing and valuation that you learn on the first exam will be needed to understand the material in the other two exams.

Key Resources

While the curriculum is the last word for exam prep, it is simply too long to make it your only resource.

I would recommend you read through a study guide for each topic before you read through the curriculum. This is going to help you quickly get the basic ideas and will help speed your reading through the long curriculum readings. A lot of the curriculum is academic and a little dense so without a quick primer, you could find yourself re-reading passages just to understand what you’re looking at.

Flash cards are another key resource. These are a great resource to carry around with you and get a little extra studying in whenever you have down-time. Don’t buy your flashcards though. Half the benefit is from writing the problems out so you will want to make your own. I talk through how to make a set of quality flash cards in a prior post.

Practice problems, whether from the end-of-chapters or a study bank, are likely the number one reason candidates pass the exam or not. Sitting there reading the curriculum, and other passive learning techniques, will only help you retain about 20% of the material. Actively working through practice problems can help you retain at least 80% and get you well on your way to passing the exam.

As in the ethics material, a lot of candidates underestimate the difficulty of exam questions. You really need to study the practice problems to see what you will be up against for those six hours in December. I usually recommend doing at least 900 practice problems throughout your study plan.

A basic strategy

It is said that the human brain needs to see/experience something upwards of six or seven times to assimilate it into long-term memory. You’ve likely seen this in your daily life. Do you usually remember a phone number by just seeing it one time? No, you need to say it and see it a couple of times before you are able to remember it later.

The same can be said for preparing for the CFA exams. Plan on seeing or practicing the material at least 5-7 times before the exam. If you are breaking the study sessions into a weekly plan, it may look something like this:

Monday: Read study guide material
Tuesday: Practice problems and flash cards
Wednesday: Read curriculum and 30 minutes practice problems
Thursday: Finish curriculum and 30 minutes practice problems
Friday: Test over the material and flash cards
Saturday: Review study guide material and 30 minutes practice problems

By combining study guides, flash cards, practice problems and the curriculum you will be able to cover the material multiple times. By using multiple resources, you avoid getting bored looking at the exact same material every time. Notice, even on the reading days, I have added some practice problems. This is to reinforce the material you learned with active engagement.

I was quite surprised how general the questions were when I took the Level 1 exam. The first exam is an indoctrination into the industry and you are not expected to know all the details. Start by understanding the reasoning and basic ideas within each topic area and then move on to get the details. Understanding the basic reasoning in each Learning Outcome Statement (LOS) will usually help you eliminate at least one of the three answers provided.

Next week, we will start working through some of the topic areas on the Level 1 exam. We will spend most of our time focusing on core topics like Ethics, Financial Reporting, Quantitative Methods and Equity Investments but will try to touch on each topic over the next couple of months.

‘til next time, happy studyin’
Joseph Hogue, CFA

Preparing for the December Exam with a Jump on Next June



One of the most common questions I get from new CFA candidates is if it is possible to take the December Level 1 exam and then sit for the Level 2 CFA exam the following June.

To which I reply, “Possible, of course. Recommended, maybe.”

What’s the hurry?

Maybe the three years that have passed since I was a candidate have made me forget how anxious candidates are to be done with the exams. I understand that, like any academic credential, completion of the program is a big step in your career and you just want to get through it.

But are you taking the exams just to pass or are you taking them to learn how to be a better analyst? Trying to fit so much material in so little time may mean you will miss an important opportunity to really master the details. There is a ton of material in the CFA curriculum, written by some of the best minds in the industry, but a lot of it will go in one ear and out the other if you do not take your time.

Taking both the December and June exams makes for a tough schedule as well. Upwards of 600 hours studying over about nine months means a minimum of 15 hours per week devoted to the curriculum. Studying for 15 hours a week is achievable but you are going to risk some massive burnout trying to do it for such an extended period.

Even passing both the December and June exams will only get you the charter a year earlier, and that is if you will have the necessary work experience requirement.

Passing in the fast lane

For those of you intent on getting through the exams as quickly as possible, there is still time for a December and June exam schedule. You’ve got 18 weeks to the December exam which means you can accumulate the 300 hours of minimum study with a little over 15 hours per week. Some will be able to pass on less than 300 hours but many will not and it is much better to over-study than to fail an exam.

There is one advantage to the quickened strategy, that you will not need to review the Level 1 material while studying for the second exam. A lot of the material in the Level 2 exam is repeated or closely builds from the first exam. Many candidates find themselves having to review before going on to new information because of the six-month hiatus from studying.

Paying attention to the topic weights for each exam will help immensely. The first exam heavily weights Ethics and Financial Reporting. The second exam heavily weights Financial Reporting and Equity Investments. The material on Ethics and Professional Standards does not change much across each exam so spending extra time mastering it for the first exam could save you a lot of time studying for the Level 2 exam. I would also spend a lot of time studying Financial Reporting and Equity Investments within the Level 1 curriculum. You absolutely must master the material on financial statements in the first exam to be able to understand the Level 2 Financial Reporting and Equity Investments material.

You cannot afford to neglect any of the topic areas but spending the majority of your time during your Level 1 studying in these three topics will help give you a head start on the second exam.

After the Level 1 exam, taking at least a few weeks off is probably a good idea but you will want to start studying for the June exam as soon as possible. The Level 2 CFA exam is regarded as the most difficult by many candidates, especially for its huge amount of formulas.

I guess there is nothing wrong with a December-June exam schedule if you do not mind studying overtime for the better part of a year. Even if you are not successful on one of the exams, time spent studying is time well-spent and will help you in your career. Just remember not to neglect other aspects of professional development like networking or taking on more responsibility at work.

‘til next time, happy studyin’
Joseph Hogue, CFA

Professional Networking in the Virtual Age



I have a confession to make. I am one of the worst offenders of what I am about to post but I bet I’m not alone. I have 810 connections on LinkedIn and according to the site that puts more than 14.7 million other professionals in my network.

But would I be able to tell you anything about 90% of those first-level connections? Probably not.

And that is where many find themselves, with a huge virtual network but no real connections to help manage their professional career.

Maybe networking is not supposed to be this easy

While traditional networking should not be the painful process that many see it as, I’m not sure that it should be as easy as clicking ‘accept’ with no exchange between yourself and another. Sure, there are clear benefits to expanding your network through virtual platforms. We are able to build relationships with people that we would otherwise never meet. My ‘network’ spans nearly every country and just about every industry. Virtual networks help us keep in touch with our connections on a much more frequent basis than we probably could otherwise as well. A quick scan through profile changes lets me stay updated on what people in my network are doing.

But then there are the obvious disadvantages and traps we fall into as well. The ease of virtual networking has given us a false sense of connection and made it easy to neglect establishing stronger relationships. After all, why do I need to work to establish 10 strong connections when I can set up a network of 14.7 million with the click of the mouse?

Having too many ‘connections’ will make it impossible to really keep up with the connections you need to manage your career. Most of the social platforms are set up to run a news feed of things happening in your network. Are the important events and updates in your network getting buried under a pile of news from people you barely know?

Ultimately networking is about using those connections to help each other professionally, whether directly or indirectly through a second-level connection. Do you think you could do this with most of your connections? Would you feel comfortable recommending the people in your network based upon what you know about each of them? You are the only one that can answer the question, “How many connections are too many.”

Time to develop real connections

The benefits of virtual platforms for networking are too good to let them go to waste by superficially building your network so make a commitment to take advantage of them.

I know a lot of people will recommend going through your connections and deleting anyone that isn’t directly relevant to your professional sphere. It depends on how many connections you have but this might not be altogether necessary. If your list is still relatively manageable, you might just try categorizing people into spheres of importance. People with which you want to build a strong relationship would go in one folder and all others in another folder.

Once you’ve cleaned up your network, it is time to work on those relationships like you should have at the beginning. Browse through everyone’s profile and categorize connections within groups of experience, topic of expertise or anything else that might make it easier to organize. The idea is that when you have a question or want to talk to someone about a specific topic, you can quickly look through your network for the right person. This will not only help you answer your questions more quickly but will also help you get to know people in your network.

You probably do not need to talk to everyone in your network every week, maybe not even every month, but you should make it a point to interact with them. Before you go to a presentation or other professional event, send out a personal invite to the connections that might be interested. Regularly check up with your connections to get their opinion on the most important news and event for their sector.

Maybe it’s just that virtual networking is still so new for many of us that we have not learned to use it effectively. I know I’ve got a lot of cleaning up to do.

‘til next time, happy networkin’
Joseph Hogue, CFA

Life and the CFA Professional



We finished up our series on career management last week and candidates still have upwards of six months until the study season begins for next year’s exam. It is usually this time of year that I am urging candidates to stay active professionally and academically, but let’s get real here… you busted your butt to prepare for the CFA exam and many of you did it while juggling family and a job.

You deserve a break.

Give the numbers a break

A friend recently confessed to me that he has focused solely on his professional life for so long that he is having trouble disconnecting and just having fun. For the last ten years, he has been singularly driven to improve himself as a professional analyst.

He spends upwards of 50 or 60 hours a week working as an analyst in a Chicago commodities firm, usually spending a few hours at home each night to finish up on some reading. The books he reads during his free-time are usually somehow related to work, i.e. financial history, commodities and other concepts in investing. He goes out once or twice a week but much of the time it is to networking or other professional social events. His life has become so limited that, when he does go out with friends, the only thing they talk about is work.

I can sympathize with his plight and can see a lot of myself in the story. The industry is extremely demanding and sometimes being successful means sacrificing other parts of our lives but it should not become your life 24/7 and 365 days. Maybe the biggest challenge many of us face is limiting the time spent working or in professionally-related activities during those periods of the year where we can have some real free-time.

You need a hobby

There are a million-and-one hobbies and things you can do to take your mind off of the industry. If you’re having trouble thinking of an activity or hobby, try a web search for bucket lists. These lists of things people want to do before they die can be a great resource for one-time events or things you can do on a regular basis.

One of the most detailed bucket lists I’ve found is at:

http://bucketlistjourney.net/2012/01/543-bucket-list-ideas/

I like to exercise as one of the things to take my mind off of work. I know a lot of analysts that become extremely competitive in their sport or activity, almost taking it to the professional level. Even if you don’t push yourself to the limit, challenging yourself physically can really take your mind off of everything else.

Cooking is another hobby I’ve tried to pick up. In our hectic lives where time is money, it can be too easy to order out every night. It’s nice to relax and take the time to create a truly amazing dinner.

Your hobby doesn’t have to be something mainstream or recurring, just something that you might enjoy doing in any particular week. Make a point to spend some time with friends or family. Visit the local museum or a park every once in a while.

‘til next time, relax.
Joseph Hogue, CFA

Getting the Job: From Networking to Interviews and Beyond (part 5)



This is the last post of a series we have run over the prior few weeks highlighting some of the great resources available to candidates through the CFA Institute’s Career Resources. We covered networking, branding, job search techniques and interviews in previous posts. This week, we will wrap it all up with career management and what to do after you’ve got your dream job.

For resources from the Institute: Click through to CFA Institute – then to Career Resources – and then to Library. The first clickable link on the page will take you to, “Sessions on Career Management,” and 39 separate resources. You will need your candidate Id number to login to the site.

Did you forget how hard you worked to get the job?

The resources on career management are all podcasts, between 10 minutes and an hour, and take longer to browse through than the other topics we’ve reviewed. Don’t neglect the topic though, it is one of the most overlooked by employees.

The fact is that many people stop strategically thinking about their career after they land a job. Worse yet, many forget how grateful they were and how hard they worked to get the job and they soon fall into a daily routine that gets them nowhere. Constant career management is about two things, guiding your long-term career goals and guiding your career where you currently work.

Just because you love the company for which you work does not mean you want to or have to work their forever. It may be a great job and give you tons of experience but there are a number of reasons why your long-term plans may take you elsewhere.

  • Is the firm large enough for advancement opportunities?
  • Will the position/sector you want ever be available?
  • Does the firm deal in the asset class in which you want to work?
  • Does the culture fit with your long-term goals, i.e. family

Don’t forget that even the strongest, most long-lived firms may fall on hard times. Even if you see yourself at your current employer, you cannot afford to completely cut yourself off from the rest of the investment community.

Guiding your long-term plans just means being aware of how you want your career to progress, what rungs do you want in your career ladder, and devising a rough plan on how to climb your ladder. This includes knowing the limitations of your current firm and what other firms can offer. The four-part Career Conversations series with Khalid Ghayur lays out the topic very well and is definitely worth a look.

Guiding your career where you currently work may or may not be different from your long-term plan. I included it as a separate idea here because I see a lot of employees quickly fall into a rut after they get the job. The worked so hard to get the position, were so happy to get it but then lose their momentum. That desired position becomes just another job and they miss out on the opportunity to manage their career at the company.

Everyone’s job can get monotonous at times. The best advice I can offer is to formalize milestone career goals. These should be things you want to accomplish within six-months, one-, three- and five-years. The earlier periods (i.e. six-months and a year) should have multiple goals and may be more defined while the longer-term goals may be more strategic and vague. Regularly reevaluate your milestone goals to make sure you still want to get there and you are on track to achieve them.

Again, doing all this alone will not be half as effective as seeking the advice of someone else. With career management it is better to seek the advice of a supervisor or mentor rather than a peer. You don’t have to tell your supervisor that you see your long-term goals at another company but talk with them openly about how you can advance at the firm.

It strikes me, writing this series on getting a job and career management, that two very important ideas are prevalent across all the topics.

  • You need to be strategic to reach your goals. Know where you want to go and plan on how you can get there. Planning two steps ahead will put you at least one step ahead of the rest of the crowd that is reacting to their environment instead of guiding it.
  • You need to be active to reach your goals. Too many people passively go with the flow and wait for opportunities to come their way. Unless you have a guardian angel (i.e. someone that is pushing you to your goal and being active for you) then opportunities are not going to seek you out. You need to seek them out by knowing where you want to go and putting yourself in front of them. Attend conferences and professional events, be active in your local CFA society, do research into special topics and become an expert in things that may not be directly related to your current position.

We’ve still got at least four months before you need to start thinking about the next CFA exam. This is the perfect time to review the resources on the CFA Institute’s website, career resources or otherwise. Don’t just be a participant in your life’s story, actively guide it and you won’t regret where you end up.

‘til next time, happy job huntin’
Joseph Hogue, CFA

Getting the Job: From Networking to Interviews and Beyond (part 4)



This is the fourth post of a series we will run over the next few weeks highlighting some of the great resources available to candidates through the CFA Institute’s Career Resources. We covered networking, branding and job search techniques in previous posts. This week, we will look at one of the most intimidating and difficult stages for many candidates, interviewing.

For resources from the Institute: Click through to CFA Institute – then to Career Resources – and then to Library. There are five linked-documents for interviewing, most offering a list of tips. You will need your candidate Id number to login to the site.

From 1-in-100 to 1-in-10
Congratulations, you have made it through the mountain of submitted resumes for a position and actually landed an interview. Getting the call for an interview is a huge affirmation of your skills and experience, especially in today’s ultra-competitive environment.

As great as it is to make it to this stage, don’t forget that there are likely at least five or ten other candidates that want the job as badly as you. You’ve improved your chances but you can’t let up on the effort until you sign the employment contract.

Among the resources on the CFA Institute’s page, “Effective Interviewing and Negotiating Techniques” and “The 25 Most Difficult Questions…,” offer the best notes on preparation.

  • Understand the company and the type of person they usually hire. Are many from a specific school or field of study? Do they prefer newbies or people with strong experience? What is the workplace atmosphere, laid-back or hard-charging? Most candidates will give a cursory glance at the company’s website but this won’t tell you anything about how personalities fit in the office. Proving you are a good fit with the culture is just as important as proving your skills and experience.
  • As with your resume, it is important to be able to answer questions with definitive proof. Make sure you are able to support your skills with an anecdote and quantitative proof.
  • Be brief and listen to what they are saying. Avoid talking for more than a couple of minutes without some input or response from the interviewer. This will help avoid rambling or getting off topic. If you can turn the interview into a conversation, it becomes much more enjoyable for both and increases your chance of making a connection.
  • Don’t be afraid to ask for feedback on your answers and skills. If you can address the interviewer’s biggest problems/concerns during the interview then you’ll have a better chance when they are making the decision later.

The ‘Behavioral Interviewing Worksheet’ provides a nice template for answering experiential questions. These behavioral experience questions are popular with many employers because they cause you to ‘prove’ your abilities through actual experience. Make sure you keep each part of the question brief, the worksheet recommends 2-3 sentences, because it can be too easy to ramble and lose focus.

If you thought you were done with networking when you got the call for an interview, think again. One of the best suggestions I’ve ever heard was to find someone already working for the company to get the inside-scoop on the interview. They may not offer much, depending on how well you know each other but it is an opportunity you do not want to pass up. Does the company ask behavioral questions, will there be some kind of test, do they ask opinion or off-topic questions? Having an idea of the type of questions could save you a ton of time in preparation.

While it should go without saying, make sure you follow-up with everything you promised in the interview. Did you promise to provide contacts for references or to find some other information? At minimum, you need to send an email thanking the interviewer for their time.

As with most of the steps we’ve looked at in the series, you really need to be working with someone on your interviewing skills. It’s easy to sit there and read your pitch back to yourself but you’ll never get the feedback you need. Find someone else on the LinkedIn CFA group or around your city that is also job hunting and team up for feedback and support.

Next week, we’ll wrap up the series with career management and what to do after you get the job.

‘til next time, happy job huntin’
Joseph Hogue, CFA

Getting the Job: From Networking to Interviews and Beyond (part 3)



This is the third post of a series we will run over the next few weeks highlighting some of the great resources available to candidates through the CFA Institute’s Career Resources. We covered networking and branding in previous posts. This week, we will look at resume writing and strategic job searches.

For resources from the Institute: Click through to CFA Institute – then to Career Resources – and then to Library. The Personal Branding material is about halfway down the page. Resumes and Strategic Job Searches are the last two topics on the page. You will need your candidate Id number to login to the site.

Do people still use resumes?
There is only one resume link to, “Insider Tips for Resume Writing,” offering nine bulleted tips. In the age of ubiquitous internet profiles, resumes may seem outdated but are still universally used by employers.

HR and employer time is limited, especially with the hundreds of resumes they may be receiving, so it is imperative that you get there attention quick. Put a summary section above everything else that gives a one or two sentence pitch and offers a few bullet points of your top achievements or skills.

One of the hardest but most important things to do on a resume is to quantify your accomplishments. Anyone can say they helped improve the return on a portfolio but you need to be able to prove it. Spend some time to analyze your own contribution to your past employers. Did you suggest and/or lead a project or investment. If your split with the employer was friendly, they might be able to offer ways to quantify your accomplishments.

In keeping with the idea of a restricted time reading your resume, the tips suggest limiting it to two pages though I am still from the old school that tries for one page. This means limiting the amount of information and the number of employers you list. Focus on your most recent and most relevant experience.

Crafting a superb resume is still not going to get you out of networking. The author of the linked tips states that 75% of all new positions are won through networking. While I’m thinking this seems a little high, you absolutely must make those personal connections.

Strategic Job Searches
I couldn’t have told you what ‘strategic job searches’ were before I started this post but the Institute offers nine files for review so I figure there must be something to it. From reading through the resources, it appears that searching ‘strategically’ is just integrating all the topics (i.e. resume writing, branding, networking, interviewing) and formalizing a process for the search.

As a type-A person who likes to have everything planned out ahead of time, the need for a strategic search seems obvious but the resources are no less helpful. It strikes me that a lot of candidates think getting a job begins with a search on Monster or eFinancialCareers but have very little idea of what they actually want to do besides make money. If you do not fully understand what you want and what you can offer, then you won’t be able to relay that to a potential employer and will have nothing to separate yourself from the crowd.

I would highlight two resources available on the site. Effective Job Search Campaigns gives you a template, though you may want to add or delete some sections, to formalize a marketing plan and a few helpful tips on networking.

Job Search Strategies for Today is probably the most detailed resource with 44 slides that cover quite a few different topics including resumes, planning and social media. You will want to take some of the ideas within this resource to develop the template from the previous resource.

Next week, we’ll look at those all-important interviewing skills.

‘til next time, happy job huntin’
Joseph Hogue, CFA

Getting the Job: From Networking to Interviews and Beyond (part 2)



This is the second post of a series we will run over the next few weeks highlighting some of the great resources available to candidates through the CFA Institute’s Career Resources. We covered networking in last week’s post and, as much as I would like to move into resumes and interviewing, we need to cover something almost completely overlooked by job candidates…personal branding.

For resources from the Institute: Click through to CFA Institute – then to Career Resources – and then to Library. The Personal Branding material is about halfway down the page. I like the first link, “Building and Managing a Professional reputation,” for its straight-forward questions but it won’t take much time to browse through all the material on the site. You will need your candidate Id number to login to the site.

Personal branding? It’s not like I’m Coca Cola

You may not be a multi-billion dollar company with a product to push but you are still trying to sell something, yourself and your skills.

Sure, you hold the CFA designation or are working towards it but that puts you in the company of about 280,000 other charterholders and candidates. That is on top of the masses of new finance grads and the consolidation in equity analysis over the last few years that has left fewer positions for which job seekers must compete.

Personal branding WILL get you a job! I can say this so confidently because the process is so neglected by job seekers that working it into your job search will distinguish you from all the rest. As with networking, there are several slideshows and resources on the Institute’s webpage. Most are relatively brief, notes from a presentation, so you might want to check out something from the library. You don’t have to spend weeks developing a plan but give it the time it deserves and it will pay off.

Branding is actively creating a perception of yourself and your skills. This means sitting down to think through the idea and writing down a formal plan. Do not just spend 30 minutes and figure that you will remember your brand without writing it out. Actively creating your brand means seeking out ways to display it so it gets built into people’s perception. This includes public speaking, writing or blogging, as well as highlighting it on all your communications material like resumes and business cards.

The best advice I got from the resources on the website was to be focused and differentiated, understand your value proposition and the specialized solutions you can offer. Think creatively here. Experience is not the only value proposition. If you lack experience, you need to develop your brand around something else.

Potential brands

  • Cross-specialization : Are you someone that has strong experience in other areas? There are tons of analysts out there but many cannot put two sentences together intelligibly. I have built my brand around being able to produce persuasive and thoughtful writing around strong fundamental analysis.
  • Perseverence: Everyone says they are passionate and will, “do what it takes.” If you can prove it with a short anectdote then the brand might be yours. Have at least two stories of how you went above and beyond or overcame huge obstacles.
  • Be the First or the Leader: You don’t necessarily have to be the very first to do something as long as there are few that do it. Make sure to pick something that will be in demand by a large enough universe of employers.
  • Be the Expert: This doesn’t necessarily mean being the global expert but could be the Expert among the group of job candidates. If you do not work in the topic or have much experience, you’ll have to take the time to develop it. Read everything you can on the subject and seek ways to develop your expertise. Volunteer to speak on the topic or submit analysis to journals or to newsletters.

As with any communications strategy, branding works best if it is integrated across multiple channels. You need to focus on your brand across your LinkedIn profile, resume and cover letters, business cards and in your face-to-face interactions.

Whatever brand you choose, stop saying you are, “well-rounded!” Do you know what this tells me, that you do not know your strengths or are not an asset in any particular area. It is fine to have some good general knowledge but you need to be able to bring something extra to the team.

Next week, we’ll look at a few resume tips and some job search strategies.

‘til next time, happy branding.
Joseph Hogue, CFA

Getting the Job: From Networking to Interviews and Beyond



This is the first post of a series we will run over the next few weeks highlighting some of the great resources available to candidates through the CFA Institute’s Career Resources. We’ll start with some networking ideas, highlighting some of the best articles, handouts and presentations available on the site.

Through the next few weeks, we’ll move through the career search highlighting interviewing, resumes, personal brand development and communication skills. Don’t feel like you have to wait for the posts though, click through to the CFA Institute’s site and take a look at some of the resources available.

Click through to CFA Institute – then to Career Resources – and then to Library
You will need your candidate Id number to login to the site.

It’s not what you know
After 300+ hours studying for your exam and countless hours spent in your undergrad program, I’ve got bad news.  You may have neglected the most important skill for our industry.

Most people think of networking only when they get ready to find a job. Don’t let the fact that you’ll spend much of your day following portfolio returns and market analysis fool you, your success in the investment and asset management industry lives and dies on relationships. This is most obvious for the brokers and advisors but the dealmakers and analysts also need to know who is looking in the market for their advice and expertise.

Networking can be frustrating at first. It’s not really taught in school and the ease of social media platforms like LinkedIn has given people a false impression of how to really make connections. Networking is not adding someone as a “connection” on your profile and it is not simply “Liking” someone’s repost of the cat playing piano video.

Networking is about getting to know others, their job and their personality, and understanding how the two of you can work together to achieve both your goals.

Ok, so most of you are saying, “That’s fine but I NEED a job now and that’s the only thing I’m thinking about.” That’s understandable and your networking will eventually lead to job opportunities, but…

Try to approach networking first as the opportunity to meet others in the industry and learn. Too many job hunters rush through getting to know someone and jump right into asking for a job. When you do this at a social event or conference, you immediately stop being someone with which the other person is interested in building a relationship and become just another resume.

There are a few handouts and multimedia podcasts available on the CFA site, my favorite is, “Building Success through Strong Networking,” put out by Marshall Brown & Associates. Handouts like these will give you tips and some good starter advice for networking but the best way to learn is by getting out there and practicing.

Don’t just scan through the handouts. Actively read through and compare the advice with your experience in the last couple of times you’ve been to a social or networking event. Did you do anything particularly well? Chances are you will find some points that you either didn’t do well or actively avoided. Use the handout and your experience to write out a networking plan, not a long book on meeting people but a half page outline on what you are going to do at the next event you attend.

Better yet, write it on a small index card and take it to the event with you. Looking back on the outline during the event can be a great way of forcing yourself to do some of the things that you actively avoided in the past.

There are a ton of tips available in the handouts but my favorite is to network with a friend. Working with a peer will help you develop your ‘elevator speech’ ahead of time. At the event, you can use each other to help with introductions. Each of you plan on meeting at least 3-5 people then introduce each other to the people you met. After the event, talk about what you were able to do from your outline plan, what you might have missed and what you learned.

Your local CFA society is your best bet for networking events. From there check out the local business organizations and your connections through LinkedIn. After going to a few events, you will start to see familiar faces and your ‘real’ network will grow exponentially. Start talking about what you want to do through your career and what you think you be great at doing.

Next week, we’ll look at a few resume tips and some job search strategies.
‘til next time, happy networkin’
Joseph Hogue, CFA

After the Exam: Taking a Break without Breaking Your Momentum



First, congratulations on making it through another year of studying for the CFA designation. The relief you feel depends on how many more years you have to earn the charter but the accomplishment is as tremendous for level one candidates as it is for those taking the last exam.

Now, you’re probably sitting there wondering, “What do I do with all this marvelous free-time?” Sure you want to reconnect with friends and re-learn the names of your kids. That in itself might be enough for some people, but we are driven people and need to be doing something more. Even more, no one is relaxing in this industry and you can’t afford to rely on what you learned yesterday to make you competitive tomorrow.

This is a great time to put the material you learned for the CFA exam to practical use. This is going to serve two purposes. First, it is going to reinforce the material and you won’t have to review when you begin studying for the next exam. Levels II and III each have supplemental review sections ahead of many of the readings because many candidates neglect to keep the topics fresh in their mind. Save yourself a lot of time and don’t lose the information you studied so hard to remember.

Using the material is also going to help you grow as a professional. The smartest guy in the room still isn’t worth squat unless he can put his intelligence to good use. Working through the material on a project will help you see what works best and you’ll pick up new ideas along the way.

Being proactive with your own work

If you are not employed or not working in the industry, you absolutely must be putting together your own portfolio of work examples. Want to be an equity analyst? Who is going to hire you if you have never worked on a report? Putting together a couple of sample reports will not get you a job that requires years of experience but it will show your ability and enthusiasm and it will put you higher on the list.

If you can find a mentor, so much the better. This can be a professor or a connection, anyone with prior experience in the field. Have them help you with a roadmap of creating your project; i.e. sources, process, material from the CFA curriculum that you will use. Don’t ask for their entire day, just a lunch to outline what you need to do to put a report together. If you cannot find a mentor or someone to help you for a limited time… you probably are not trying hard enough or are doing something wrong. Our industry, as with many things, is all about networking and you need to develop the skill of reaching out to connections.

Leverage the exams at work

If you’re already working in the industry then talk to your supervisor about how you can use the curriculum in your job. The CFA curriculum is fairly practical so you should already be using some of the material. First, sit back and think through the topic areas and readings yourself. Ask yourself, which parts am I currently using and which might I use more. Of course, this is all assuming that your supervisor is open to change and new ideas. If he’s not then you may want to consider your options because his lack of creativity is eventually going to hold your growth back.

Side projects and team leadership are a dirty word around some offices but can really make your career if you succeed. Keep your ears open to planning and development needs and volunteer to lead or sit in on projects. Keep in mind that you may be studying for the next CFA exam in six months so be mindful of the time the project is going to require.

Whether you add a few responsibilities to your existing role or take on a new role, the idea is to use the material from the CFA curriculum. Just working through the exams and holding the designation has value in itself but it’s nothing compared to being able to use that knowledge.

Would love to hear how you used the information or how working through the exam has helped you professionally.

‘til next time, enjoy your break
Joseph Hogue, CFA

Best Songs, Movies and Activities to Recharge before the CFA Exam



Less than a week left to the exam and there’s little I can tell you that is going to change your test score. At this point, an old Louis Armstrong quote always comes to mind, “Man, if you have to ask…, you’ll never know.” By now in your studies, you’ve either got it or you don’t.

It doesn’t mean you can’t get a little more studying done this week. I always took the last week before the exam off from work to get another 40 hours of review before I closed the books, but that is what it should be, review. Just cementing the information in your memory before the big day.

Whether you are using the last week for one last cram-session or not, your brain probably feels like about three pounds of slush and you just can’t wait to get through Saturday. It’s always about this time that I needed to step back and recharge.

Watch – Listen – Or Just Do It!

There’s about a million and one things you can do to get your head back in the game this week. I am a big fan of music and always love a good motivational song. After three hours of studying, I need at least three minutes of rockin’ out to recharge. Some of my favorites for pushing myself just a little bit farther are:

Destiny’s Child, “Survivor”
Eminem, “Lose Yourself”
Europe, “The Final Countdown”
Katy Perry, “Roar”
Kelly Clarkson, “Stronger”
Queen, “We Will Rock You” and “We are the Champions”
Survivor, “Eye of the Tiger”
Twisted Sister, “We’re Not Gonna Take It”
Bon Jovi, “It’s My Life”
U2, “It’s a Beautiful Day”

Ok, so I am definitely showing my age with this list and there’s surely more than ten that could be listed. It was a close call between Twisted Sister and LMFAO, “Sexy and I Know It” for #10 but…hey, I’m a child of the 80s. If nothing else, maybe just reading through my list will help you to relax a little with a good laugh.

I really like movies for relaxing as well but they’re a little harder. When I think of a motivational movie, I want a climactic ending that makes me want to jump up and do something. A lot of great movies just do not have the ending. Others are just too darn long and still others can leave you shell shocked. Try sitting through all 169 minutes of Saving Private Ryan and not thinking long about life afterwards. Anyway, some of my favorite ‘sit back and relax’ movies:

Back to the Future (1985)
Rocky (1976)
Wreck-It Ralph (2012)
Star Wars (1977)
Spiderman (2002)

Again, unless you’re in your 30s or older, you’re probably scratching your head just a little. I originally wrote out nine of my favorites but figured five movies in your last week of studying is probably way too much time in front of the television anyway. Wait until after the exam to sit back with a Star Wars movie marathon (ok, at least the original trilogy).

The die-hard overachievers out there will complain if I don’t add exercise and other activities to the list of stress-relievers. Going out for a jog or a work-out can be a great way to clear your mind and recharge. I wouldn’t be running too many marathons unless you’re used to that kind of thing, but a good 30 minute workout can do wonders.

After six months of studying, you’re probably asking yourself, “What’s a hobby?” As long as you can complete it in a couple of hours or less, a lot of candidates like to return to the past-times that always made them happy. The idea is to pick something that you can enjoy for an hour or less and then get back to the CFA.

Whatever you do to recharge, get to it and get back to studying. Just five days left.

Good luck on Saturday,
Joseph Hogue, CFA

 

Your CFA Exam Day Strategy



By now you are probably freaking out about the upcoming CFA exam on June 7th. Even candidates that have taken the exam before get butterflies in their stomach as test day approaches and if you are not even a little bit nervous, you might want to check your pulse.

Fortunately, very few candidates have problems unrelated to the material on test day. We have all heard horror stories of another candidate forgetting their identification or getting lost on the way to the test site, but these problems are fairly rare.

Even so, the day could be extremely stressful and it helps to know exactly what you can expect. There are also details that can help you have an easier, if not enjoyable, test day.

Test day: T minus 3 hours
I’ve covered the need to plan your route to the test site in other posts but it cannot be emphasized enough. Make sure you know how to get to the test and you may even consider booking a night in a nearby hotel. A nice leisurely stroll to the exam can help calm your nerves and you’ll face no risk of traffic problems.

I always made sure to arrive a couple of hours early to the exam. How early you wake up and arrive at the site will depend on how far you need to go and personal preferences. If you arrive early, you can always take the time to meet other candidates. These will be your peers throughout your career and can be a great source of information and networking.

As far as food, play it safe for breakfast and lunch. Do not eat too much more than you usually do or load up on greasy foods. You don’t want to be hungry but you also don’t want to be so full that it makes you groggy. Do not drink more coffee than usual. On the other hand, don’t forget to have a cup of coffee if you are accustomed to the caffeine pick-me-up. You are allowed to use the restroom during the exam but it comes out of your allotted time.

Once you arrive at the exam site, you may need to sign in with proctors. This usually begins up to a couple of hours before the exam. If you do not see a registration table, ask other candidates.

About half an hour to an hour ahead of the exam (to tell the truth I don’t remember which it is), you will be allowed to enter the testing area. Any personal belongings not allowed during the test will need to be left in the lobby or in your car, so plan ahead. You may not wear any hats while testing. As you enter the testing room, you will show your admission ticket and find your assigned seat. Lay out all your materials in front of you on the table.

The proctors will begin reading the testing policies and rules. At this point, no talking or looking around! Every year, candidates are removed from the exam for cheating because the proctors saw them talking or looking at another candidate’s test. Whether you are actually cheating or just looking around may not save you from getting kicked out. Don’t risk it.

Test Day: Zero Hour
Follow the rules exactly. Do not open your test booklet until told to do so. This should be obvious but candidates get in such a rush that there is often someone that gets reprimanded for it.

Some candidates bring ear plugs for the test. I never had a problem with noise distractions but it is a good idea just in case. I have heard horror stories of open windows and lawn mowers distracting candidates. If you are at all distracted by small noises, bring ear plugs.

I was always amazed at some candidates that do not quit writing in answers after the session is completed. Some proctors will just warn you or repeat to put down pencils but you run the risk of having your exam thrown out! Do not risk it for a couple of points!

Lunch is always a big question. Should you eat or talk with others? What and where to eat, etc.

Again, don’t eat too much or eat anything that might upset your stomach. If you have a ‘comfort food’ or something that helps you relax, that is probably your best bet. As with finding the test center, you may want to plan where you will eat or your options the night before. The safest bet may be to pack your own lunch for test day and eat at the site. Be careful not to pack anything that is going to spoil if not properly refrigerated. Packing my own lunch always seemed too boring and I found that getting away from the test site for at least half an hour helped me to relax and recharge.

A lot of candidates obsessively avoid talking to others out of fear that someone will say something that destroys their confidence. I always felt a little more relaxed by socializing with other test-takers. We never talked about the exam, other than to mention whether it was easier or harder than we had thought. Whether you talk to someone else or not, I guarantee you will realize you missed a problem or second-guess one of your answers. GET OVER IT AND RELAX! No one has ever gotten a perfect score on the exam. Worrying about the morning session is the quickest way to fail the afternoon session.

I would often catch about 10 minutes of flash card studying before lunch was over. Sometimes you can guess which topics have a good chance of showing up on the afternoon section by what was not asked in the morning. If there are a few equations or processes that are still giving you problems in topics that were not in the morning section, this might be a good last-minute refresher.

The afternoon session will go exactly like the morning session. You will file into the testing room, showing your admission ticket. It must be the same admission ticket with the proctor’s check on the morning session so keep it with you and do not write on it. Once inside and at your chair, the proctors will read off the testing policies again.

You are allowed to leave the test if you complete early but no one can leave within the last hour of the exam. In my opinion if you complete the exam with more than an hour to spare, you are either extremely smart or rushed through it. Do you really need to be somewhere so quickly that you leave time on the table for one of the most important professional exams of your life? I recommend checking through your exam at least once. Make especially sure you have filled in the correct bubbles for the correct number.

Many local societies have some kind of party after the exam. Try to go to these if at all possible. They will give you a chance to relax and network with local charterholders and candidates.

The CFA Institute is always the last word on exam day do’s and don’ts but rarely changes policies. You have put in enough time studying and worrying about the exam. You shouldn’t have to worry about minor details of taking the exam as well.

‘til next time, happy studyin’
Joseph Hogue, CFA