Last Saturday was a beautiful balmy day here in London. The kind of day that sends Londoners into a frenzy of delight involving some combination of parks, booze, snacks and proud displays of lobster torso.
Me, though, I had another plan. Along with nearly 10,000 other hopefuls I trooped over to the Excel Centre in London’s Docklands to sit 6 hours worth of exams – the dreaded CFA. Level 2 in fact. It is quite brutal – physically and mentally extremely demanding from 9am until you’re released back into the world at 5pm wondering what the f**king hell just happened!
It is a kick.
The results aren’t out so this is the time to cast a critical eye on the revision and exam journey. My guiding principle is always to accentuate good process over outcomes but this is easier said than done when the outcome is staring at you in the face. My thoughts focus on how I would approach the study process if I had to repeat. These are somewhat ex tempore but want to capture them while still fresh, they tend to reflect other guides on Level 2 Here goes:
1. Level 2 is not just an extension of Level 1, it has its own flavour.
What worked for level 1 won’t cut it here. I don’t mean in terms of how hard we have to work or in relative difficulty – both are extremely difficult and the pass rates attest to that. Level 2 did seem more difficult but there is a recency effect that most likely accentuates that impression.
They do test in different ways and we have to adapt our study to appreciate the differences. In level 1 the questions are discrete; while in level 2 we have the itemset, a 1-3 page block of text followed by 6 questions.
This requires a more joined up understanding of the various concepts in the exam and makes working on exam technique far more important. First order knowledge is not enough.
2. Time, intensity and the order of study
From the weights below you can see which topics dominate and from a little investigation you’ll get an idea which are the hardest topics for you:
Source: CFA Institute
The oft repeated heuristic is that 300 hours of study are needed to be in a good place come exam time. Assuming this is a fair number (seems fair) then I would change elements of how I approached this.
For level 1 I started in late February or so and was quite meticulous in my planning and execution such that by early May I was in a decent position. This time I planned on starting in March but in reality only got going toward the end of March and it was only going into May that I really pushed the throttle and went for it. This lateness was my first and biggest mistake and why I needed to work on so many second level techniques – so the best advice I can offer is give yourself the time you need.
Additionally it would have helped if I was more considered with my ordering of topics. I had ‘the fear’ in (the highly weighted) FRA (Financial Reporting and Analysis) and FI (Fixed Income) but I decided to tackle the easier topics before approaching them. A surer method would have been to break the back of the hard ones early, at least to the degree that the fear and tension that came from their unknownness is dissipated.
Instead they hung over me. Unfairly so, as when I eventually dug into FRA topics such as Intercorporate Investments or Pension Accounting they were not only (relatively) manageable but far more enjoyable (and useful) than I expected.
I never got to that degree of confidence with FI but if I had I would be far more confident in passing.
3. Knowing is best, but it’s how you handle what you don’t know that will get you over the line
There are two ways to answer a question. The first is the obvious way – know the answer or the method to get the answer. This is the best way; but there is a lot to know so you may not possess all the necessary elements. Also questions are often designed to stress this knowledge (by using second order elements or masked terminology for example).
If we don’t know we must fall back on the second method which is to make probabilistically informed guesses aka guessing with style. This was a technique I practiced with care and deliberation, my style was something like the following:
a) Chunking and understanding conceptual frameworks – my aim was to proceed with an eye on learning (within reason) rather than merely to pass. I decided to study with the intent of understanding rather than rote learning (as far as I was able). This surprisingly turned out to be a good method even if the initial time and effort commitment is larger and you’ll sweat your brain in brutal ways.
We can break out a topic into different levels. The first is to build a relatively complete understanding of the core structure and flow of the topic area and the links to other topics. We can learn the Free Cash Flow formulae verbatim (this is a good summary) or we can try to understand the different starting points and why some adjustments are necessary or not. This provides a more supple and contextual grasp of the material. Hopefully when answering a question, we have texture and the flow thus don’t need to recall facts that are dangling in a vacuum.
b) Less is more (if it is the right less) – The next level is to fill in the core elements. My technique here was to not over learn. Take the example of accounting for inventories which has an emphasis on LIFO-FIFO. In the study materials we find a long list of the effects on key ratios and statements using the two methods with a “LEARN THIS LIST!” command.
I ignored this. Once I understand the adjustments required I didn’t need to know anything more as I could think through the flow when required. It takes a little longer than just knowing the answer but I save a bundle of time in the learning, understand the concept and am not reliant on my (creaky) memory.
c) Work backwards – Then there are the questions which leave us clueless or our bête-noir topics. These are still valuable points so we hone a variety of tools for dealing with them.
I struggled with swaps to the last day, a topic that induces paroxysms of despair (btw this is the best explanation I could find anywhere. In truth swaps aren’t so bad but there is a lot going on and it is easy to find yourself dazed and confused.)
The worst of these are fixed-for-floating currency swaps. If I get a question on this, the initial reaction is to freeze, squint hard and the brain fog to descend. But in an exam I don’t have the luxury of indulging this fear, I need to give myself a chance of answer correctly.
Somehow crack some air into this coffin.
One way to do this is to start with the end – the answers. One of them is right. Without having complete knowledge how can I put myself in a strong position to choose it? How can I deconstruct this question into elements that will help me? What do I know?
I know there are two relevant strands in the swap – the currency exposure and the fixed for floating payments . If I glance at the question I can ascertain hopefully (with crude calculation) which way the swap will be a winner and a loser and also the magnitude. As an example if there is a big currency move and the interest rate differentials are small then the currency element is likely to dwarf the net effect of the payments. With this information alone I may be able to answer the question. At the very least I should be able to eliminate one answer.
Then I look to refine the order of magnitude in terms of payments (again crudely) to hopefully give me a clearer choice. I keep an eye on the discounting required and the dates but if the rates are low then I can almost ignore these. Finally you make your best guess and look to revisit time permitting. It is a 3 minute question and 1 mark like all others, so to fritter 8 or 9 mins is not good practice.
d) Permutations – Another practice with calculation dense questions if you are a little unsure of a few elements – such as in FCF, pensions etc. is to calculate the elements where you are comfortable, leave that subtotal and then calculate the permutations of the other inputs. But you do this with an eye on the answers. This is handy when you’re not sure whether to add back tax, amortisation etc etc. – calculate them all.
e) Clear Working – heavily related to the last point and rather obvious but if you set out your working clearly you’ll find questions far easier and the permutation technique is vastly improved. Often I would make the necessary calculations and find the answer was not close to the answers on the sheet (especially when you are tapping furiously on your calculator and not looking that you’ve put in the correct numbers). When I looked back at my scribblings they were incoherent so I would start over.
The solution was so easy and effective. Just write it out properly. That way you can also keep an eye out for dates and other assumption tricks that may catch you out.
4. Practice papers and itemset formats
If you have access to something like the Schweser question bank that is great (I didn’t use this for level 2). I used the great Investopedia resources initially. They are really valuable during the initial learning phase but they offer only individual questions so don’t develop the necessary itemset skills.
As soon as is practical (and depending on availability) I would move to working on itemset type questions. The CFA Institute offer a whole load of practice questions and a free practice paper but however many you can get your hands on will pay for themselves over and over. (side note: they have to be decent quality, I looked at some which ended up confusing me). This is where a candidate working off the corporate budget has a huge leg up as they’ll have access to plenty of good quality question sets.
The first few practice exams I took (or half exams to be accurate) were depressing in outcome but invaluable in directing and honing study.
I can’t stress how important it is to master itemset type questions through practice, feedback and development.
5. Embrace the Chaos
Level 2 is a chaotic, seething ocean of information and our challenge is to skillfully engage with that chaotic unknown and bring enough order and insight to provide good answers. All under time pressure.
This is a point worth considering long before exam day. In the exam we will be exposed to conditions outside our control. It is useful to not require specific conditions or mental or emotional states in order to perform well.
I practiced tackling questions when agitated, annoyed, despondent, hungry, tired or when there was noise or other distraction. And I sought space and concentration in all circumstances as well as accentuating releasing tension in between stress moments (thank you Josh Waitzkin).
In this manner I found the exam experience far more pleasant than level 1. Not just the familiarity with the process but the comfort of knowing that emotional or physical states wouldn’t put me off track.
6. Looking after yourself.
This is an intense experience and you’ll do yourself a load of good by taking care of yourself in the build up and on the day. Running yourself into the ground is risky and not pleasant.
There will very likely be moments of deep despair (in the last week I bumped into many people studying in my regular haunts and they all had that wide eyed, gaunt and slightly unbelieving look in their faces – “there’s so much!” despaired one girl when I asked how it was going).
Hopefully you’ll have a good support network who will help you along. If you don’t give me a buzz and I’ll give some pep talks J
My nadir was after my second practice exam. I scored extremely poorly and felt terrible, complaining and moaning to all and sundry (“I’ll never pass, it’s useless blah blah”). That evening (after attending a talk on the Rwandan genocide) I had a stern word with myself. Instead of complaining I would get on, do my best, learn. And enjoy.
This is a privilege, not a torture.
The next few weeks were calm and far more pleasant (although after my outburst everyone tiptoed around me a little when asking how it was going.)
Wrapping Up – Passing, Failing, Regrets and Singing Badly
Now it is just the wait for the results. The first question people ask after ‘how was it?’ is ‘do you think you passed?’. I have no ready answer – the base rate pass rate is 40-45% of candidates so the likelihood is that I haven’t (assuming the quite reasonable assumption I am about the same level as most other candidates). This is an exam of fine margins with large effects. We shall see.
Let me end with the beginning – Jay Z and regrets. This is the tinge when we think of the (too many) answers we should have known. What could have been? These are the songs of our lives and a proxy for all our stumbling and falling. Success hides regrets, failure shoves them in our face. But the only regret we should heed is the regret of omission. The song not sung. Or sung in a whisper.
For someone not used to this mindset this directional shift is pleasing: Try, try well, learn, improve, enjoy – keep going. The rest will take care of itself. Maybe.
Strangely it is this pleasure that will linger.
Peace and all the best.