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Becoming a Chartered Financial Analyst (CFA): Awareness & Competence  Thumbnail

Becoming a Chartered Financial Analyst (CFA): Awareness & Competence

The optimal functioning of society, throughout the various industries and professions, depends on reliable and competent individuals. The proper management of any task depends upon competence developed through sustained concentration, the consistently successful application of the developed competence to the naturally variable conditions of reality, and the continuous pursuit of additional information for revising previously-established facts, concepts, theories, methods, and beliefs to ensure efficient and effective (well-informed) decisions.

Every task with its result depending on changes in conditions or values should involve an awareness of the current conditions (broad collection of information). This should be done prior to the initiation and completion of the task, an awareness of the relevant individual decision factors and the interrelationships between the deciding factors as separated from the totality of information (known as systems thinking), an estimation or determination of the likelihood and amount of change in the relevant decision factors (which is limited by their level of predictability), and the application of effective methods to the current and likely future values of relevant decision factors for producing the optimal consequence.

Every profession has unique facts, concepts, theories, methods, and advancements. However, what is common between excelling in professions is the requirement of a broad and deep understanding of all the elements involved in determining results. The CFA Institute is the industry leader in providing a broad and deep financial education for investment professionals.

The CFA Institute was established in 1947. Its mission is to increase ethical and analytical standards necessary for high-quality investment management decisions. They do this by providing a thorough body of knowledge consisting of approximately 7,000 pages of qualitative and quantitative information for testing across three levels of examination.

As reported directly from the CFA Institute, candidates who successfully passed the CFA examinations reported studying on average over 300 hours per each of the three examinations. Essentially 1,000 hours of self-discipline, often in addition to the time and energy consumed by a full-time work schedule, are required to become a chartered financial analyst (CFA). There are some admirable character traits that are required and demonstrated through becoming a CFA. Being curious, adhering to a strict schedule, making calculated sacrifices, sustaining focus, thinking logically, ensuring accuracy, and maintaining determination are a few of those traits. What is even more valuable from a practical investment perspective is the awareness and competence built through the mental journey of the CFA curriculum.

The CFA Institute curriculum consists of a collection of detailed writings. These are often written by those with doctorate degrees in ethics, quantitative methods, economics, financial reporting and analysis, corporate finance, equity analysis and valuation, fixed-income analysis and valuation, derivatives, alternative investments, and portfolio management. 

The sections pertaining to ethics include coverage of the knowledge of the law, the independence and objectivity of decisions and recommendations, misrepresentation, misconduct, material nonpublic information, market manipulation, loyalty to clients, fair dealing, suitability of investments, performance presentation, confidentiality, supervision, reasonable basis in reasoning, communication with clients, record retention, conflicts of interest, the priority of transactions, and other additional ethical topics.

The quantitative methods section teaches concepts related to the present value of money, the future value of money, statistical analysis, probability calculations, estimating average values for factors of interest from samples, testing proposed theories, creating models for prediction, analyzing data over time within or between industries and companies, machine learning, and other quantitative subjects.

The topics on economics involve analyzing consumer demand, analyzing company supply, understanding the different market structures of competition in different industries or geographies, total output for countries, total income for countries, factors of economic growth, nature of business cycles, monetary policy, fiscal policy, international trade, and capital flows, currency exchange rates, regulation, and other economic considerations.

The financial reporting and analysis lessons explain financial statement analysis, financial reporting standards, income statements, balance sheets, cash flow statements, financial analysis techniques and ratios, inventories, long-term assets, income taxes, long-term liabilities, financial reporting quality, intercorporate investments, employee compensation plans, multinational operations, financial institutions, and the integration of analytical methods among other reporting and analysis topics.

The sections on corporate finance elaborate on corporate governance, investment opportunity selection, the cost of capital (money) used to support business operations, sales risk, operating cost risk, financial risk, the management of short-term assets and liabilities, the influence of a company’s financing sources on company valuation, dividend policy, share repurchases, mergers and acquisitions, and other subjects relating to corporate finance.

The topics on equity analysis and valuation teach about different methods for valuing public and private companies, different methods for calculating returns, industry and company analysis, all asset classes and contracts, financial intermediaries, types of investment positions, investment order instructions, primary and secondary financial markets, index types, how accurately market prices represent actual economic values (market efficiency), the risk and return characteristics of equity investments, and other lessons on equity securities.

The sections on fixed-income analysis and valuation explain the types and characteristics of bonds, the issuance and trading of debt, valuing debt securities, analyzing asset-backed securities, the risk and return features of debt investments, credit analysis, interest rate conditions, factors influencing interest rates, and credit default swaps along with other debt topics.

The sections on derivatives inform the candidate about the various types of derivatives, their purpose and benefits of them, as well as the misuse, valuation, and other concepts dealing with derivatives. 

The alternative investment lessons involve hedge fund strategies, private equity strategies, real estate risk and valuation, infrastructure investments, commodity sectors, the life cycle of commodities, commodity strategies, and other alternative investment considerations.

The sections on portfolio management cover exchange-traded funds (ETFs), multifactor models, the measurement and management of market risk, testing and simulating strategies, constructing optimal investment portfolios, and assessing the risk and return of portfolios. They may also cover managing financial and non-financial risks, understanding the interactions between risks, analyzing market charts and indicators, recognizing the significance of financial technology, as well as, other management-oriented lessons.

It is clear throughout society that individuals and companies equipped with above-average competence are more likely to produce above-average results. However, this can only happen if they are able to effectively apply their competence in a thoughtful, practical, and valuable way to succeed at their purpose. Becoming a CFA may be a noteworthy achievement, but it is not the only factor required for optimal investment decisions. The CFA designation is merely an indication of the competence and character of the designee; It is not a guarantee of optimal results.

As mentioned in the introductory paragraph, optimal investment decisions are only possibly achieved through maintaining comprehensive awareness of opportunities and applying high-quality reasoning to the macroeconomic and microeconomic facts associated with investment opportunities. One must have an awareness of every investment opportunity depending mostly on a persistent work ethic and efficient tools, and high-quality reasoning depending on established and continuously-evolving competence. 

I believe, we, as humans, have a moral obligation to develop competence and maintain awareness. Awareness and competence are necessary for maximizing the quality of our decisions and our overall influence within society. This is true whether within our families, friendships, profession, or even within our often brief interactions with strangers. How can we be optimally moral, optimally skilled in our professions, and optimally nurturing to those in our lives unless we are aware and competent? 

Moral perfection, professional perfection, or perfection in the quality of our nurture is nearly impossible. However, there is a significant difference between humbly attempting to achieve “perfection” in the pursuit of excellence compared to lazily accepting or arrogantly believing that our current awareness and competence are “good enough” for those who depend on us. Attempting perfection is honorable while neglecting to evolve is pure immorality. 

At Financial Strategies Group, we are highly aware of the harmful consequences of ignorance both in the personal and professional realms of life; therefore we prioritize continuous learning across the firm to protect against defective decisions and ensure we are operating in the most informed and logical manner to optimize results for our clients. 

While serving as the primary investment analyst at the firm - you can guarantee that I will never become complacent. In the years and decades that follow, becoming a Chartered Financial Analyst (CFA), you can be assured that I will never lose my curiosity and dedication to continuously expanding my awareness and competence through diverse resources for the purpose of intelligent investment decisions. There is immense honor in trust, so I will strive my entire life to maintain and increase the justification for the trust you have given Financial Strategies Group.

To entrust us is your decision.

To justify your trust is our obligation, but more importantly, our purpose and pleasure.

Written by Hunter Biggs

This commentary on this website reflects the personal opinions, viewpoints, and analyses of the Financial Strategies Group, Inc employees providing such comments, and should not be regarded as a description of advisory services provided by Financial Strategies Group, Inc or performance returns of any Financial Strategies Group, Inc Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Strategies Group, Inc manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.


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