The CFA Exams are a grueling marathon. The average candidate spends around 300 hours studying for each leg of the race followed by a brutal 8-hour test day of mental toughness. If you are reading this looking for a short-cut way to pass, you will not find it here. What you will find are my personal experiences and ideas which have helped me navigate the trials and tribulations of 1,000 hours pursuing a challenging goal. The idea behind giving others my insight is most blog posts related to passing the CFA exams are not from people who have taken them but instead are marketing teams for third-party prep providers. I hope you find the following useful in your pursuits.
You Need A Roadmap
If you asked me what the most important thing you need to pass the CFA exam is I would tell you one word: Preparation. Passing or failing is not about mental capacity, IQ, or background. It is about your willingness to put in the work to set yourself up for success. In the words of Ferris Bueller, life comes at you fast. I had my car stolen a week before my Level II exam and had to deal with filing police reports and insurance. Luckily, I was prepared and didn’t lose much sleep over a few hours not studying.
Timing. To pass the CFA exams, you need to set yourself up with about six weeks out knowing ~40-50% of the material. At the start of May, you should have completed all the readings and have started doing questions on the content. This will set you up nicely to test your skills with practice tests and review them. The rest of how the journey is completed is below.
The Power of Habit
Yes, The Power of Habit is the title of a book by Charles Duhigg. I read the book before studying for Level II and it helped me build my study habits. Imagine you are trying to tip over a vending machine. You are not strong enough to do it in one push, so what do you do? You slowly rock it back in fourth, gaining momentum as the swings of the heavy machine get larger and larger. Eventually, the vending machine reaches a breaking point, and gravity takes over knocking it to the ground. This same approach is what you need when you start studying until you build the habit of doing it every day. Don’t delay diving into the material. Start with 15 minutes a day. The next week, study 30 minutes a day. The third week, increase it to 45 minutes. Eventually, gravity will take over propelling you to the necessary time you need a day to sufficiently study for the exams.
The Truth May Be Hard to Hear
If you are struggling to find the material interesting and cannot engage yourself enough to read, then maybe the CFA Program is not for you. That is okay. Many financial professionals are successful who do not have the CFA Charter. My point is it is all or nothing with the commitment to studying. There is no half-assing these exams with a reasonable expectation of passing.
Third-party Providers (Kaplan, Wiley, etc.)
My advice – use them, especially if you already have a background in Finance. In my opinion, the CFAI material does a great job of explaining the theory and giving you real-world examples of how it is applied, but you do not need the extra fluff to pass. I used Kaplan for reading the material and Mark Meldrum videos to hammer in topics. Lest we forget though the CFAI is writing the exams, not a third-party. The blue boxes in the text, end of chapter questions, questions on CFAI’s Website and CFA practice exams should take precedence when testing your knowledge.
Saving money. Your local CFA society may have coupon codes to save money on third-party materials. Also, make them compete for your business. I used Kaplan for Level I and Level II but called Wiley to inquire about their materials for Level III. After wavering with the salesperson for the latter part of the conversation, they gave me 50% off to convince me.
The adage of no question is a stupid question applies here. If you have a problem I can guarantee you there are others who are struggling with the same thing. So ask. My personal favorites are Reddit’s r/CFA and Analyst forum.
Logic and Understanding over Memorization
I will start with a story about a guy I will call Steve. Steve was a successful financial professional at large mutual fund company and did well in school. I met Steve through my local CFA society, and we studied for Level I together. Steve knew the CFAI material down cold and when a question arose, he could regurgitate the formula. If he did not know the formula, he could probably tell you what page it was on. Steve failed the Level I exam. Why? There is too much material to remember thousands of definitions, concepts, formulas, and derivations of those formulas. We need a better way of thinking about things to remember them and logic and understanding is the key. Here are a few examples:
Formulas for Free-Cash-Flow:
FCF = EBIT (1-tax rate) + (depreciation) + (amortization) – (change in net working capital) – (capital expenditure)
Where Networking Capital is Current Assets (excluding cash) – Current Liabilities (excluding Short-term debt)
Unlevered Net Income = Net income + net Interest after tax
Unlevered Net Income +/- Change in deferred taxes = NOPLAT (Net operating income less adjusted taxes)
NOPLAT + Net noncash charges – change in working capital – CAPEX = Free Cash Flow
Now I have made the above somewhat confusing to prove my point. I never memorized these formulas. Let’s think about this logically. What is free cash flow? It is an assessment of the amount of cash a company generates after accounting for all capital expenditures (Property, plant & equipment) and noncash charges. If I have a deep understanding of the CFA material and accounting principles, I know which accounts and charges are non-cash. I can go to point A (NI, EBIT, EBITA) to Point B (FCF) without knowing the formulas, even if I had a general idea I could add and subtract out of order.
Put Call Parity
Here is the Formula from the CFAI material:
s + p = PV(X) + c
Somethings you will just have to straight remember, but you do not need to make it harder than it is. Cow boys sing pretty if you like George Straight. Cow(calls) + Boys(bond) = Sing(stock) + Pretty(put). By using a simple expression, I know put-call parity. I also can also find the value of a call, put, stock, and bond with this formula. For every formula, there are about five derivations of the same thing. My recommendation is to learn one and use algebra to solve for the rest.
When, Where and How to Study
When: Whenever you can is an excellent time to study. Your commute, during lunch, after work. If there is time to read for 15 minutes or look over a few notecards, do it. Commit to giving yourself to the exam, and it will pay dividends later.
Where: I will give you the same answer above, wherever. I will also say it is a good idea to change up where you study. You do not get the luxury of taking the test at home, so spending some time at the library or a coffee shop where there is some distraction from other people will keep your mind guessing. You will learn how to deal with the candidate who has a whooping cough on test day.
How: I have seen a majority of people claim they have a difficult time remembering the material they have just read. When examining how they are studying, it makes sense why they cannot remember the material. Highlighting while reading is a shallow level of memorization but writing information down has been proven to help with memory. Here is how I approached it: Read the material while taking notes. Take the notes I wrote down and create notecards out of them. When studying the notecards write down the answers as I am reviewing them. Over the course of six months, I have written down a formula, concept, or definition around ten times. It is hard work and will slow your reading pace down considerably, but hard work pays off.
Notecards. Then more notecards.
There is so much material to remember for any Level of the CFA exams. Notecards are essential for a few reasons. They are small; they allow you study them wherever you are. They are a quick way to test your knowledge in short increments. They are great in bed. Countless studies suggest studying before bed helps memory.
A few things to remember with notecards: When coming up with the answer on the back of the notecards, it should not be a straight regurgitation of the definition but instead logic and understanding as described above. Buy an 8×10 whiteboard on Amazon and write the answers on the opposite side of the notecard down. Again, writing things down is proven to commit information better to memory.
Mind-maps are an excellent tool for understanding how money flows through income statements, balance sheets and the like. I used them many times during Level II so I could understand how pensions and intercorporate investments were treated. It does not have to be anything fancy or have to make sense to anyone but you. I placed it above my desk and looked at it every night before going to bed so I could remember the information. Here is an example of one I made:
I am taking Level X, what’s different?
Check back for more blog posts about how to approach the different levels of the CFA exam.
Getting your reps in
Practice tests are without a doubt the most critical part of your journey preparing for the test. If you were going to run a marathon, you would not get up on the couch and do it. You’d slowly build up and work your way to being able to run a marathon. Once you can run the marathon, you would practice it a few times, so you know how it feels and what you need to work on to finish the real deal. The same thing true with the CFA Exams. At this point, you have completed all the readings and have completed some questions whether it is with a third-party or the CFAI material; you can run a 10K (and in a literal sense, read it too). However, have you done it for 6 hours in a row yet? How about 3 hours? It is time to take a practice test.
Personally, I completed six full practice exams before each test. My local CFA Society holds a practice in person Kaplan exam about a month and a half before the test date at the local college. If you have this opportunity, do it. Without even looking at the scores, I was more nervous to take the practice exam then the real one; it helped me cope with anxiety on game day. It is essential to put yourself under the real pressures of the exam, even with a practice test. Pencil, no phone, approved calculator, quiet, and complete focus.
There will be a slow progression as you get your reps. The first practice test I took for each level, I only got a 50% mark, and that is fine. The important thing is to give yourself enough time to slowly get better to finish the race. I recommend having six weeks between your real test and when you start taking the practice test. Each week take a practice exam and then review it. The review is just as critical during this stage, you need to look not only at the answers you got wrong, but the answers you got right. This will give you the opportunity to review the material and not make the same mistake twice. If you can hit 65-70% on practice exams under real testing conditions, you are going to be in good shape to excel on game day.
Right before the test
Every time before I took the CFA exam, I played golf and did not once touch my books. You are 24 hours out, a last-minute cram of 3,000 pages of text is not going to help you. Six months of hard work is what helped you. The last thing to do is to get all the materials you need for the next day prepared so you are not scrambling in the morning. Here is my personal checklist before exam day:
- Pencils (make sure they are the correct kind that works with the scantron)
- Calculators (I bought two just in case one crapped out, it is better than bringing a tiny screwdriver and batteries)
- Exam tickets (I printed two because you never know)
- Mapquest to the testing center. Just kidding it is 2018, use google maps and know your route.
- Lunch (see story below)
- Energy drinks (do 5-hour, no sugar to crash)
- Jacket (in case it is cold in testing center)
- Alarm clock set
- Holy Bible (just kidding, if you are prepared you will not need divine intervention)
The story about lunch. I typically go to Chipotle the night before and get a bowl to keep in a cooler in the car. You can go out for lunch, for which you will have an hour, but I do not do this because I get to change my game plan at halftime. For example, if I know 30% of the test is on FRA and I have not seen very many questions on this, the hour lunch gives me a chance to review because I know FRA is coming. The other thing that can happen if you go out to lunch is something unforeseen. Last year I was eating lunch in my car when I heard a car crash outside of the testing center. A car was pulling into the testing center making a right turn, super simple right? A motorcycle for whatever reason was passing him on the right in the shoulder as he was turning. The car took out the motorcycle leaving him in pretty bad shape. Ambulances, police, statements. The guy driving the car never made it back into the testing center to finish the second half. I would rather be prepared and not leave these things to chance.
D-Day (formerly know as test day)
It is here. I wish I could give you some Oscar-winning game time speech before you run into battle. Your eyes are wide, and you are staring down the tunnel onto the field at the Rose Bowl. The adrenaline is flowing as you walk into the testing center, but you need to fight it. You cannot waste energy today, no distractions. You have studied for a long six months – blood, sweat, tears, pain, suffering, the bruise on your nose from when you smashed your head into the FRA book after reading the about Pensions for the fourth time. You are prepared, you are ready to go, you are ready to perform. Execute and leave no questions in your mind you are going to pass. Positive thoughts bring positive actions. You can do it. Now….Just do it.
Strategy. I did not read the material in order; I am better at some topics than others. I choose to start with the topics I know I am going to excel in first, so I can get the momentum and confidence I need to finish the sections I am not great at. I believe this is why I passed the CFA exams. If I ran into questions I was not great at, and then ran into more questions I was not great at, how do you think my confidence level is when I run into questions I am good at? If you are going to do this, do not mess up your bubble sheet.
Hitting the fucking wall. Sometime during the test, you will hit the wall. Moreover, when you do, you will know what I mean. I remember sitting for Level I in the afternoon section on FRA. I lost focus, I could not think straight, and I was sure I had gotten the past ten questions wrong. I got up, splashed water on my face in the bathroom, and skipped the FRA section for derivatives which I am more comfortable answering. That saved me from getting below 70% on FRA because with my mind refocused later on in the test and I was able to think clearly.
Keep to yourself. You have come this far and do not want to ruin your day with a PCP Investigation. I keep my head down and don’t socialize with others. Save the pleasantries for the bar after the test. Proctors are walking around and are amongst you posing as students. You do not want to be overheard or interpreted as talking about the test or cheating, so for one day shut up and do your job. When you are finished and waiting for time to be called, play heads up seven up and put your head on the desk or look at the ceiling. Wandering eyes produce many investigations.
I do not know the answer. Move on and come back to it. Some of the questions are on the same topics, so it may help you remember later. Whatever you do, do not sweat not knowing an answer. It is a long test. Guessing does not hurt you either so do not leave anything blank.
Timing. I have never had an issue with time usually finishing in just over 2 hours for each section. If you are prepared and timed yourself during the practice exams, you should not have an issue either. If you come up against the clock, when the time is called, drop your pencil. If you do not, it is an automatic PCP investigation.
I took the test, now what?
Relax. Have a beer, or two, or three. I can remember after taking the exams your brain is mush after spending 8-hours at the testing center. Enjoy your accomplishments. It is common for candidates to stress out directly after the exam or even the following week when reflecting on their answers to specific questions. So much so they are going back to the text to see if they remembered the information correctly. Just stop, what’s done is done, and there isn’t anything you can do about it. There is no point to continue to stress yourself out over a couple of questions out of a couple hundred.
The truth is, you walked out of the test center a few months ago not knowing if you passed. It is finally the day you get to see if your hard work has paid off. The anticipation will get to you as you nervously wait for the email.
I passed. Congratulations, your hard work paid off. Celebrate again. Please note the proper way to put your accomplishment on your resume and social media.
I failed. I will do some quick math for you. Level I Pass Rate: ~43%. Level II Pass Rate ~40%. Level III Pass Rate: ~53%. Guesstimation probability you pass all three levels consecutively: (.43 * .40 * .53) = 9.1%. The CFA Institute does not give you this information, but speaking to others who have failed, I would say 50% of them failed at least one leg. Either because they did not adjust to the vignette style of Level II or they slept on level III because they saw the light at the end of the tunnel. From this information, we can guess the average Charterholder passed all three levels in 4-5 years. It is part of the process and life. Pick yourself back up, figure out your weak sections, and give it hell next year.
Dealing with a PCP Investigation
I have no experience going through a PCP investigation but have read about many who have. If you did cheat, shame on you; you deserve what is handed down to you because others give up six months of their lives for one day a year. If you did not cheat, absolutely fight it because you worked your ass off to get to this point. If you are going to fight it, treat it as you are responding to an appeal after appearing in court. Your response to a PCP Investigation should be similar vernacular as a legal document. Do not admit fault, have a clear and definitive answer to the issue. I might even consider hiring a lawyer draft the document. If you find yourself in this position, it is unfortunate but is part of the exam and the high ethical standards set by the CFA Institute. Hopefully, all is well in the end.
If you made it this far, you hopefully have a better idea of how to run the marathon. Please check out my LinkedIn and contact me if you have questions. Thank you for reading.
Sean Carey, June 2018 Level III Candidate in the CFA Program