To set the stage for my failure, I started a new job as an equity analyst after getting my MBA and had just passed Level I in December. For many years, Level I was given in December and June, while Levels II and III were only offered in June. Level I was easy to pass as I liken it to an undergrad finance degree, which meant I had all of that curriculum down.

Feeling good after easily passing Level I, I decided to press my luck and register for the Level II exam in June. This is where things took a turn for the worse…

Before I get into the details, we need to first talk about what to expect from the exams at each level. Here is how I can best describe them:

Level I

As noted above, this is the knowledge that any undergraduate finance major should know. That doesn’t mean they don’t have to study, but they will find it much easier than non-finance majors. If you are one of the latter, you will need to study for this and take it very seriously. That said, the pass rate for Level I is usually the lowest of the three levels, but that doesn’t mean it is the most difficult exam.

The pass rate is so low because everybody and their mother, uncle, and best friend’s sister’s boyfriend’s brother’s girlfriend sign up for the Level I exam. Most of these people don’t have a solid understanding of finance fundamentals and think they can just take the exam and suddenly have a career on Wall Street.

We all know this is not true.

Level II

This is where things start to get serious. If Level I is like an undergraduate finance degree, then Level II is like a master’s level finance degree. And when I say master’s, I don’t mean an MBA. This level is more like what a future Ph.D. student would cover on their way toward a doctorate.

I went to Level II for the first time sleep-deprived from having a newborn baby at home, along with a severe sinus infection the week of the exam. None of this was conducive to taking a difficult exam that covers material a mile wide and an inch deep.

I will never forget one of the item sets I completely whiffed on that day. It was a set of questions about options on bond interest rates. Not the prices of the bonds but rather the yields. This meant you had to layer derivative math on top of bond math. Good times! Needless to say, my brain short-circuited on that question.

Note that the pass rate for Level II is typically a bit higher than Level I, but that’s because Level I weeds out about half the test takers.

Level III

Level III is where the first two levels come together to give you an attempt at applying the principles learned in the real world. Nothing can replicate knowledge gained from world experience, but at least they try to weave it into the program. I somewhat liked this level, but I know people who hated it. Your mileage may vary.

This level has a typical pass rate greater than 50%, but the number of people who sit for the exam is usually CFA Exam Pass Rates. This is survivorship bias in action.

How to Pass the CFA Exams

Now that I have sufficiently buried the lede, let’s talk about what you can do to increase your chances of passing the CFA exams. The key to passing the exams is understanding the main problems that led to me failing Level II. The two main problems in not passing the CFA exams are:

• Not allocating enough time to prepare for the exams
• Not utilizing third-party study materials

Time

The rule of thumb is to spend 300 hours studying for each exam. This number came down from the investment heavens and was inscribed on a stone tablet for Benjamin Graham. Seriously, though, I have no idea where the 300-hour number came from, and I have no clue how many hours I studied for each level. The key is to give yourself enough time to get through all the materials without cramming. And by time, I mean spread it out over many months.

Why? Because you cannot cram for any CFA exam, so don’t even attempt it. There is too much material to remember in a short period of time.

Instead, adjust the average time spent studying to your current situation. As a baseline, I would plan to study for 4-6 months. Based on my experience, this is enough time for someone without many distractions.

Circling back to my first attempt at Level II, it’s clear that I left the appropriate amount of time for the average person. Still, I needed a more extended study plan, given that my circumstances limited my daily time to study.

Life will get in the way when you study for the exams, so plan accordingly.

Third-Party Study Materials

I did not use third-party study materials for Level I and passed with flying colors. This gave me a false sense of security that led me not to use any the first time I sat for Level II. This did not work in my favor, so I used some the second time and passed. We all know correlation does not equal causation, but the extra materials helped.

Why? For two reasons. The first is the ability of third-party materials to do a better job of distilling the materials into a more practical, test-passing package. By that, I mean the CFA study materials read more like an academic textbook, and the third-party study guides read more like a CFA cheat code to be used to pass the exam.

Based on this, you might be tempted to skip the CFA materials and head straight to the study guides, but the study guides are so much more valuable once you have read the curriculum first. If you give yourself enough time, there is no reason not to use both.

The mock tests are another essential and underrated aspect of third-party study materials. These are invaluable and need to be used because they are the only way to test (pun unintended) your knowledge before the exam. Not taking practice exams is like an athlete spending all their time in the weight room and not practicing their sport-specific skills before the big game.

This is another reason to give yourself plenty of time to study so you can leave time to take practice exams. In my case, getting a wicked sinus a week before the exam put an end to my homestretch of practice exams and was detrimental to my score.

The Konami Code to Pass the CFA Exams?

The upshot of this might be a little disappointing – there is no shortcut to passing the CFA exams. You have to put in the work. I wish I could give you some hack to pass, but there isn’t one. I have yet to meet anyone who has figured out a hack. Just suck it up and put in the work.

You can make life a lot easier on yourself by spreading the preparation over an extended time and using practice exams to ensure you are game ready on exam day.

The post How to Pass the CFA Exams appeared first on Life on the Buy Side.

Everything you’ve learned or read about networking for jobs in finance is wrong. I know this because I’ve recently realized that everything I’ve learned or read about finance networking is wrong, too. Either you’re now confused by that statement or you think I’m being arrogant. But bear with me as we look further at how networking in the finance industry is taught online …

Here is how the finance networking process is usually defined as on the internet:

Step 1 – Develop a list of contacts. Research every potential firm you’re interested in and identify the people in those firms who you want to reach out to. Remember that your goal is to land an interview and then a job from that interview.

Step 2 – Prepare your cold email template (see the internet). Prepare for some light stalking.

Step 3 – Cold email everyone in your newly curated contact list.

Step 4 – Sit around and hope that one of those people email you back.

Step 5 – Holy sh*t! Somebody emailed me back and is willing to meet for coffee! You meet for coffee and ask for an interview.

Step 6 – Nail your interview and win the job offer. Yay!

Easy. Right?

While this process can land you a job offer, it misses the big picture when it comes to networking. Networking is not a simple linear process with a defined ending. It is so much more than that and it took me way too many years to figure that out.

The real way to network and get more out of life is to remember these three little words: Play the Game.

Jocko Willink uses that phrase a lot on his podcast and I always thought it had a bit of a Machiavellian ring to it. Like you are manipulating people to get your way. Indeed, the “standard” networking steps above feel like you are using people to get what you want.

However, it took me a long time to figure this out, that Jocko doesn’t mean that at all. What he’s really saying is – Build Relationships. This is the only way to success in networking and yet it’s always the most glossed over part of networking. Why is that? Because it takes work. It is not easy but the payoff at work and in even in your personal life is worth it.

So how do we build relationships in finance and on Wall Street? It starts with the alumni of your university. These people are the most likely people willing to listen to you. You need to get in front of as many alumni as possible. However, do not blindly cold email these people. You can and should use it as part of your overall strategy, but cold emailing as many alumni as possible should not be the main part of your networking strategy. I get cold emails from students all the time and I can’t recall ever responding to one.

That’s not to say I don’t help out students, I just don’t respond to cold emails. The best way to get my attention and that of other people in the finance game is to use an introduction. But you’re probably wondering – I don’t have any contacts so how am I supposed to do that? You have more contacts than you realize, you now need to leverage them by building relationships.

I said I don’t answer cold emails but I do help out students, so how does that happen? When someone I know, usually a professor, introduces a student to me. This type of introduction is WAY more effective than cold emails. Start by building relationships with your university professors – don’t just sit at the back of the lecture and sneak in and out of every class. Get to know your professors. Be active in class, stay after to chat with the professor … build that relationship! If you’re out of school, then reach back out to your old professors. You will then use those relationships to get introductions to alumni in the field you want to get into. THIS is the best way to get that cup of coffee and begin your networking.

Now you’ve been introduced to some alumni and have had the cup of coffee discussion, then comes the hard part that is always glossed over – follow up! This is the hard part in work and life and I should know because I’m terrible at it. This is the point where I constantly have to remind myself to “Play the Game” because it is hard work. Building relationships can feel like a full-time job at times, but trust me when I say it is worth it.

Then what? Follow up again!

Finance networking is not like Tinder or some other dating app, building relationships takes time. Think about your close friends for a moment – were you that close to them from the day you met? Nope. Repeated positive interactions led to building that relationship. You are now going to have to do that same thing to build your network.

So keep in contact with these people you meet in any way possible. Send a follow up after the meeting and ask the person if you can stay in touch in the future with any questions you might have. Finance folk generally think we’re really smart, so we’ll take any chance to show off what we know. Hell, that’s basically the entire existence of this website for me!

Anyway, depending on how well the initial meeting went along with the follow up, I recommended following up every one to three months. Often enough to stay on their radar screen but not so often that you’ve become an annoying pest. Obviously, feel out the person. Some are more inclined to engage more often than others. And if you don’t hear back on the first try, wait a week and then try again. No response after two tries? They are probably not worth your time at this point.

So, ideally, your relationship building efforts have landed you an internship somewhere. The game is not over then either, my friend. Start building relationships with everyone you can at that company. Then, you probably know what I’m going to say here … follow up! Don’t spend an internship building relationships only to leave them all at the door when you leave. Follow up and maintain those relationships. Provided you made a good impression, those relationships are stronger than you think.

Now your network, which started from nothing, is starting to grow and it’s time to think about getting a job in finance after graduation. This is where you can start to leverage your network to grow your network. As part of your normal course of following up and keeping in touch with your network, don’t be afraid to ask your network for more introductions. You see how it can work with your professors, believe me, it works even better with your new relationships in the business. If you’ve done a good job of building that relationship, that person will be willing to help you as long as you ask for it.

Here’s the part where I have a bit of bad news that took me a long time to figure out on my own, though – the process of networking and building relationships never ends. The best way to succeed in finance, and any job for that matter, is to build relationships up, down, and across the chain of command. It really matters!

Now go out there and start building your network knowing that it takes time and effort but it pays off in the end.

The post Everything You’ve Learned About Networking is Wrong appeared first on Life on the Buy Side.

Warren Buffett’s partnership letters.

Now you are thinking I’ve confirmed my crazy status by first saying that Buffett’s letters are not the best followed by proclaiming Buffett’s letters are the best. Well, you’d be right if it wasn’t for one subtle difference – I’m talking about the Buffett Partnership letters to investors, not Berkshire Hathaway’s letters. The Buffett Partnership is the first investment fund started by Buffett after his mentor, Ben Graham, retired and folded up his fund.

This is like Warren Buffett’s origin story. If you want to learn more about how someone got to where there are in life, go back to the beginning and figure out how they got there. In the case of Buffett, we have vital insight into that from his partnership letters.

Now follow me as we go back in time to the late 1950s where we visit a young, up-and-coming investor …

What Are the Buffett Partnership Letters?

In 1956, Buffett had moved back to his hometown of Omaha and didn’t have a job or even a plan to start a partnership. That changed when some of his relatives asked for his advice on what stocks they should own. He didn’t want to just sell advice, so he decided to form an investment partnership in the same way as his mentor Ben Graham. Six of Buffett’s friends and relatives put money into the fund while Buffett himself became the 7th partner after kicking in $100, bringing the grand total seed capital for the partnership to $105,100. At the age of 25, Buffett became the portfolio manager of his first fund.

In 1969, Buffett decided to close down the partnership after years of crushing the market because he believed the returns he achieved over those years were no longer attainable. But during those years, as he does every year with his annual Berkshire Hathaway letter, Buffett regularly communicated with his investors about the portfolio and what he was seeing in the market. The result is we have a record of how the buy side GOAT thought about investing in his formative years. And it is during this time that he beat the market into oblivion. Here are the annual returns of the partnership compared to the Dow clipped straight from the source:

And here they are cumulative with compounding:

Despite being difficult to read, the numbers above are so absurd they are almost comical. Yet, his stated goal was to beat the Dow by 1,000 basis points annually. If you said that was your goal to a potential client today, they’d laugh you out of the room.

In the letters, Buffett often writes about the “Joys of Compounding” interest, which means to invest your money consistently at a decent rate of return and watch your money grow over time. The returns above are a glaring example of the long-term effects of compounding as the Dow’s cumulative return over the time period was “only” 185.7%, which is a respectable 9.1% per year. However, Buffet’s gaudy 31.6% per year accumulated to a 2,610.6% returns, which is 14 times what the Dow returned!

“Show me a good loser, and I’ll show you a loser.”

To start off, why haven’t other investors been able to match the record of Buffett or his Superinvestors of Graham and Dodd-ville? Buffett gave his take on the subject in the letters with three primary reasons:

1. Group Think – Buffett saw too many managers conforming to the policies and actions of their peers in the business. If everyone looks the same, everyone will get the same results.
2. Playing it “Safe” – Being contrarian is seen as a “risk” to most managers, however, Buffett saw it as an opportunity provided you’ve bought at an attractive price and have done your homework.
3. “Irrational Diversification” –  Buffett didn’t diversify, or “hug the benchmark” in today’s parlance because there aren’t enough ideas out there with high probabilities of outperforming. Big winners are rare … so you’d better take a concentrated position in that name.

Buffett’s take on investing is summed up in the old adage that it is “simple, but not easy.” All Buffett did was acquire large positions in undervalued companies with evidence that will be corrected at some point. Sounds easy, but it’s not. The letters are long but well worth the read. If you need the TL;DR version, though, here are a couple of key takeaways I would highlight.

Play the Long Game

This is a theme that comes across many times throughout the letters. Buffett is a very patient person when it comes to investing. In fact, he even wrote that he considered the “buy” part of the equation to be 90% of the game. As long as he bought at the right price, he knew the stock would pay off someday. It’s also why he always said, “Price is what you pay, value is what you get.”

He also emphasized the long game with a golf analogy: “There will be some good holes and some bad holes, but the important thing is to break par for the entire round.” The same is true when investing in stocks as you will never get every stock pick right but rather, like a casino, you want to tilt the odds in your favor through better analysis.

Finally, recall the “Joys of Compounding” earlier, Buffett was looking far into the future even in his 20s. You’d be wise to do the same …

Volatility – “If it gets silly enough in either direction, you take advantage of it.”

Buffett has always seen stock prices as an asset to be utilized if desired, as ascribed to the Mr. Market analogy first given by Ben Graham. This quote from The Intelligent Investor sums everything you need to know about day-to-day market volatility:

“The true investor can take advantage of the daily market price or leave it alone, as dictated by his own judgment and inclination.  He must take cognizance of important price movements, for otherwise his judgments will have nothing to work on. Basically, price fluctuations have only one significant meaning for the true investor.  They provide him with an opportunity to buy wisely when prices fall sharply and sell wisely when they advance a great deal.  At other times he will do better if he forgets about the stock market and pays attention to the operating results of his companies.”

If a tree falls in the woods, does it make a sound? Yes, it does, but you didn’t hear it. The same thing occurs with stock volatility – what if you opened the Wall Street Journal only once a year, would there be any volatility?

Be Different

As noted above, Buffett believed the typical portfolio manager got things wrong by copying their peers and being unwilling to stand out. To this day these stocks are known as the “crowded trades” that everyone seems to own. Back then portfolio managers usually bought only blue chip names while Buffett liked to say he invested “less conventionally.” Basically, being conventional yields conventional results.

Is this a risky strategy? I leave you with this quote to understand what Buffett would say to that question: “You will be right, over the course of many transactions, if your hypotheses are correct, your facts are correct, and your reasoning is correct.  True conservatism is only possible through knowledge and reason.”

The post The Holy Grail of Investing Letters – Warren Buffett’s Partnership Letters appeared first on Life on the Buy Side.