Analytical Skills

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Atomic_Sheep

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Hi,
I’ve kind of known this for a while but I think now is the time for me to change things.
Basically, the way I approached learning in the past relied solely on rote learning, now however, I have realised it’s time to change and become more analytical. I was wondering, how you might suggest I go about this? I’m pretty hopeless at the moment and don’t know how to get better.
 
One approach I found helpful in the past when dealing with concepts that seemed very abstract at first, was to make them more relatable by trying to create applications out of my daily life. An example: the put-call parity, defined as:
Price of Underlying + Put Price = discounted Strike Price + Call Price
This sounds very abstract at first (unless you trade options on a regular basis), so I tried to make it more relatable for myself.
Left side is called a Protective put. Now I imagine that I am currently planning to buy a house (which is kind of true actually, probably more next year but I am digressing), then I would really love to have some kind of insurance in case the house value (Price of the underlying) drops after I buy the house. So buying a put option would limit that downsize risk, I would have the right to sell the house at a certain price, so if it falls below that value I am not affected (think of the burst of the 2008 house price bubble).
Right Hand Side is called a fiduciary call. Say I actually did find a house but I am short 10% of the purchase price (which is not true but indulge my fantasy here for a second) and my credit score is so bad, that no bank will lend me the 10% that is missing. Now I am worried if I wait a year to save up the missing 10% the house price might increase (I am seriously worried about that, but I am digressing again). So I put my money on a savings acount earning 10% per year, and I buy a call option that gives me the right to buy the house in a year from now at that price, so if the price increases indeed, I am not affected.
Now I just try to memorize that these two need to be equivalent, that way there is less to remember (on a side note:Exhibit 14 in Reading 59 shows you why the have to be equivalent, the payoffs are the same).
 
Also, you might want to check out S2000’s website (one of the guys here in the forum), it provides very intuitive explanations of a lot of the concepts of the exam. I found that after getting the intuition, it was a lot easier to remember the stuff (that is even an underlying theme of a lot of his explanations there):
http://financialexamhelp123.com/cfa-level-i/
 
or go viral for this
Price of Underlying + Put Price = discounted Strike Price + Call Price
P + S = X + C
Quote:
Pamela is a Sexy X-rated Call Girl….
Click to expand...
(reference to Pamela andersen)
 
I think understanding concepts isn’t an issue, it’s more figuring out statements such as:
The potential income tax savings are a benefit of using the LIFO method when inventory costs are increasing.
(Institute 405)
Institute, CFA. 2016 CFA Level I Volume 3 Financial Reporting and Analysis. CFA Institute, 07/2015. VitalBook file.
The citation provided is a guideline. Please check each citation for accuracy before use.
That gets me. I usually don’t know where to start to figure this out.
 
Check out Example Box 5 in Reading 29 (p.405) of the 2016 curriculum. That box contains pretty much the entire story of LIFO effects on net income, retained earnings, and possible tax savings. I think once you understand that example, the sentence above will seem like a pretty obvious statement to you (for a lack of a better term, it might be one of those “No shit sherlock” or “Eureka” moments).
In general, with these statements I would recommend to go about them, by decomposing them into their elements and reviewing those before looking at the bigger picture (and if all fails, ask in the forum).
 
The short story is, if you use LIFO during periods of increasing prices, you will use the last items you purchased for inventory to report in your COGS, thus increasing your COGS (compared to FIFO, where you would have used the cheaper stuff you bought first). Now higher Cogs means your Net Income is falling, (Remember: Net Income =Revenue -Expenses).
Now if you earn less, you will be taxed less, and there is your income tax savings.
Again, if you use my advice from above, imagine you are a dealer of CFA Prep material. Now because printing costs are steadily increasing, the last items in your CFA book inventory are the most expensive ones, while as the ones you printed last year, have been printed at much cheaper costs (imagine that the books do not get updated and are all the same). Now if the IRS (or Australia’s equivalent) asks you how much money you made this year selling those books, that answer depends on which books you claim to have sold (imagine that you never completely sell out and some books are always left in inventory), the cheap ones from last year or the expensive ones from this year.
 
The short story is–rote memorization doesn’t work with the CFA exam. Sure, there are some formulas that you have to commit to memeory, and there are sometimes when acronyms will come in helpful, but by and large, you have to understand and conceptualize the CFA material.
If you rely on rote memorization, you just might pass L1, but there’s too much to memorize at L2.
 
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