The value of a CFA education

The Value of a CFA
I took my CFA level 1 examination on 1 Dec 18 yesterday. The sheer difficulty of the CFA curriculum is not exaggerated . As level 1 mostly explores the industry in width rather than in depth, the sheer amount of possible scenarios covered truly exceeds one's expectations. Now, as all is said and done, I can only wait patiently for the results to be out and hopefully pass my examination. Regardless, I have tried by best for these past months and have no regrets.

Initial thesis
1) Study CFA to be a better investor.

Since there are so many CFA as equity analysts / fund managers in those brokerage reports, there might be some value in getting the knowledge. Ben Graham is well regarded as the pioneer whom thought of establishing an institute  / curriculum to improve on the standard of investment analysts, and John Templeton and other knowledgeable investors I know (Teh, Hooi Ling, Chin Wai, Chris) are CFA holders. 

Despite scoring well for my university finance modules and valuation project , real life scenarios are infinitely more complex. Knowledge of accounting ratios, valuation and fundamental analysis is surprisingly lacking among-st most retail investors / investment bloggers. Even among-st the brokerage reports I have reviewed, some are of dubious quality and more towards speculation and optimistic forecasts, and are keen to shift goalposts when the trajectory of the ball shifts. Considering the fact that I employ ratio and fundamental analysis, it is important to improve competence in this area.

Although I do not know if CFA may leads to improved investing performance, it will at least improve my circle of competence and allow me to make less mistakes along the way.

2) Knowing how to detect bullshit and exclude noise

I have known of dreadful scenarios about investors whom lost substantial money due to mistakes of lack of due diligence in analysis. Everyone will lose money at some point, but hopefully I will avoid catastrophic losses.

Although a lot of hindsight analysis are done subsequently, it could not compensate the pain of losing substantial sums whereby it could have been avoided. As investing is ultimately a probabilistic rather than deterministic activity, it is up to me to eliminate the too hard scenarios and focus on the easy to understand cases and focus on acing in that.

History of Singapore Red Flags

i) S chips in 2018 and 2009 (Blind Belief in China growth story and false accounting numbers)

ii) Lehman Credit default swaps (Housing prices will go up forever and Lehman too big to fail)

iii) Asian Pay Television Trust share price collapse (Poor operating cash flow and unsustainable dividend policy, people believing the music can go on forever)

iv) Hyflux shares, debt and perps (Others buy it as a safe dividend and income generating play. After due diligence, I bought it as a turnaround and asset play.) Although my unrealised losses are limited due to portfolio management and position sizing, it is a humbling experience to say at the least.

v) Detecting the deteriorating financial condition of Singtel shares, independent of the popular opinion by retail investors that Singtel is dumped by institutional investors wantonly. I also determined possible moats and Free cash flow that may allow Singtel to survive the price war. I hope I am not wrong with this.

vi) Resisting the urge to participate in the crypto craze earlier this year.  I do not have an independent way to figure out what the cryptos are worth and as such I stayed away.  IMHO it is more of luck than skill that I dodged this mistake.

vii) The fall of Noble.  (Even Blue chips can collapse. Avoid companies with un analyzable balance sheets) I monitored this stock for quite some time but essentially determined it is better to dodge the hard questions.

3) Potential Job opportunities

Hopefully, having qualifications will allow me to find more lucrative jobs on the finance field. Considering the fact that I am still young with a pip squeak portfolio, it is important for me to build up a large capital base via increasing my net revenue to be channeled into income generating engine. Fiscal discipline and improving investing performance can only increase my retained earnings and port-folio to a limited extent.

The caveat of the above assumption as such. In a perfectly competitive job market and market taker, it is not the difficulty and the rigor of the CFA that determines your success but rather job market conditions. CFA dutifully segregates the one that are intelligent and hardworking (Just level 1 is a monster), but it does not guarantee anything beyond that. There are CFA holders whom are not working in the investment industry although their insights and analysis are better than most.

I am also painfully aware that a lot of investment funds are moving from active management to passive Vanguard and Black-rock low cost ETF funds, which are touted by Warren Buffet and the investment bloggers community. Essentially, with a shrinking job market, the aforementioned thesis is heavily challenged. Nonetheless, if I do not grab the chance to do this while I have the energy and freedom to do so, I will probably regret it for the remainder of my life.

Reality
The reality of the CFA curriculum is that it does not touch in depth about investment analysis. Granted it is not a Chartered Investment Analyst program, the investment methodology it covers is mainly on financial ratio analysis, valuation ratios, Dupont analysis, Factor based investing, CAPM, as well as DCF and DDM analysis.

One of the most important thing to take away from CFA is that it teaches you to detect red flags. There is huge conflicts of interests embedded in the nature of the investment industry. For relationships between client and broker-dealers, there is front running and priority of  transactions as well as subjective opinions and talking up a stock. Measuring rate of returns along can be pretty subjective from Money Weighted return (IRR) to Time weighted returns (Geometric return of Holding period Yields)

For corporate finance, there are possible creative accounting such as channel stuffing,  FIFO/LIFO restatements, finance and operating lease classifications, classifications of one-off expenses / capitalizing liabilities which are subject to the finance manager discretion. To eliminate shenanigans, it is far easier to choose a company with a clean balance sheet with good cash flow and honest management, rather than deal with complicated capital structures (Perpetuals and high debt) and non GAAP/IFRS accounting figures.





Caveats
The sheer memorization of the content of formulas is not meaningful as most investors worth their salt will have excel models to incorporate the respective Dupont analysis and DDM analysis. Width of information only proves that the candidate has great memorization ability rather than practical investment prowess.



CAPM, Efficient frontier, SML and CML has notoriously poor empirical evidence as well as dodgy assumptions to support its validity. Consider that so much effort is used to understand outdated financial concepts, it might not bring about meaningful returns. The syllabus may give you easy to determine Rate of returns and risk free rate, but how to derive those numbers is highly situational. Aswath Damodaran adds more value to the investment thinking process than an academic program.







Conclusion
Attempting the CFA curriculum is like conducting honorable Seppuku. It looks wonderful and dutiful to external people, but essentially the candidate is killing himself in the process. I can only patiently wait for the outcome in a month's time. Meanwhile, it frees up more time to pursue my other interests while I keep my fingers crossed.