Failed Rubber StampThe CFA Level 2 exam is a [insert your favorite swear word here]. The week before I took the CFA Level 2 exam I got a sinus infection thanks to my delightful spring allergies. I couldn’t breathe, I couldn’t sleep, and my head was pounding, but I had to press on.

At this point, after passing the Level 1 exam the prior December, I had been studying CFA material for nine straight months and had to give the test my best effort. The problem is that Level 2 is chock full of esoteric finance. Every other study item falls under the category of “When the hell am I ever going to use this?”

Still, I felt like I had a good enough grasp of the material that I could pass and move on to Level 3. Then, on test day, I ran into a question I will never forget. It was an entire item set on Treasury bond options. Not just bonds or options on stocks, both of which I understood, but options on bonds.

I didn’t have a clue. I mustered my best effort to apply what I knew of options to bonds, but the concept was so foreign to me that I didn’t know if my answer was even in the right area code.

A couple months later when I got the notification that the exam results were posted, I discovered that my answer had not been in the right area code. It might not have even been in the correct hemisphere because there it was:


I can’t remember the exact phrasing the CFA Institute used to say I did not pass. All I could see was that I had failed and it hit me like a sucker punch to the gut.

Given the low pass rates of the CFA exams, there’s a good chance this will happen to you, so here’s how to cope and press on after failing the CFA exam.

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Value investing stock analysisThe efficient-market hypothesis (EMH) is a lightning rod in the investment world. The staunch supporters of the EMH, primarily academics, rely on various mathematical proofs to support the theory. Critics of the EMH, primarily real-world investors, use their experiences in the real world to point out all the shortcomings of the EMH.

One of the most vocal critics of EMH over the years has been the legendary Warren Buffett. The famed Oracle of Omaha has been bashing the EMH since it was first popularized by Eugene Fama in the 1960s. Recently, a new academic paper analyzing Buffett’s career returns proves once and for all that the EMH does not hold in the real world.

Now, that’s not to say everyone can beat the market (a mathematical impossibility) or that the inefficiencies existent during Buffett’s tenure will continue into the future, but the proof of Buffett’s claims that value investing is counter to the EMH is in the numbers.

I’ve generally avoided the technical side of the investment management business on LBS, but today I’m going to geek-out a bit and analyze an academic paper that sheds light on how Buffett made his billions and became the world’s greatest investor in the process.

In their paper Buffett’s Alpha, Andrea Frazzini, David Kabiller, and Lasse Heje Pedersen analyzed Buffett’s returns from 1976–2011 and decomposed them to identify the primary factors driving Buffett’s significant alpha. For regular followers of Buffett, the results should come as no surprise, but let’s dig in and discuss the three primary sources of Buffett’s alpha …

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