James Moniter on CFA

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I don’t if this has been posted before, but I think it is quite interesting:
22 Jun 2012
“Montier said yesterday that by continuing to teach the efficient markets hypothesis and its intellectual children, such as the Value at Risk model widely used to describe risk in the financial industry, the CFA and other business educational organisations were contributing to the survival of dangerously misguided financial thinking.”
Full article here:
http://www.efinancialnews.com/story/2012-06-22/montier-attacks-business-...
Nodes
 
I think… even today, market participants have a lack of awareness that the market can just be wrong. This is especially so for derivatives which rely on complicated mathematical models. The general thinking among many traders is: 1) If the market is trading at some level, if you can get a better price than that level, it is a good trade, and 2) If everyone uses the same quantitative model, then someone who prices something on a non-market consensus model is wrong.
This becomes problematic when the market clearly deviates from a reasonable expectation of reality. I see a lot of this behavior regularly. It’s a bit disconcerting, and many of the people doing it work for name brand companies.
I think CAPM and efficient markets are a good framework to start thinking about markets. However, I think there should be a bit more emphasis on irrational or intangible factors, particularly with things that don’t have actual intrinsic value (like volatility, credit, etc.).
 
It’s the same rant the CFA haters have against the program.. imo the curriculum is the best and only way to standardize the science of investment management into an objective qualitative test. it sets a minimum level of knowledge that a portfolio manager is expected to know.
 
^ agreed - I agree with some of what Moniter says, but to discredit the CFA program isn’t right.
 
After glancing the article…
Oddly enough, the cfa programme excels almost exactly in those areas where he claims the programme is failing. The syllabus is a pretty good summary of- or comprehensive introduction to- most of the issues in modern finance and economics. It is pretty weak on mathematics/statistics,covering a broad range of topics at an introductory level. The issue about financial history he was bickering about is briefly embedded in the exposition of theories in the books with further references / reading material cited throughout. He seems to promote disentangling financial history from a quantitative approach to the subject without realising that historic moments in economics and finance are really a collection of revolutions in modeling asset prices, mistakes in model misspecfication or erroneous assumptions (quantitative/qualitative). Even if I grant him, that mathematics may not reveal all the truths between financial/economic variables or that the revealed relationships are beyond the understanding of the larger investing community, you still need quantitative methods to operationalise ideas. I doubt that the average candidate in the programme really thinks that efficient markets, CAPM are the alpha and omega of markets especially considering the silly assumptions made throughout. Not even the authors of such theories ever claimed resounding success of their ideas which are contested to this day.
 
I agree with adding much more financial history in the curriculum. People in this industry have short memories (i.e. leveraging).
 
Alladin wrote:
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Really? I found the CFA program to be pretty shallow. Sure, it’s a good introduction to a wide range of topics, but there’s no way the CFA curriculum has enough depth to give someone a real opinion about capital markets.
In general, I think adding financial history is a good step, but that alone is not sufficient. There needs to be more specific discussion about why financial models like CAPM fail in real life. And of course, these deficiencies need to be addressed systematically in practice - which is more of a role for companies, not an educational organization like CFA.
 
Thanks all for your imputs.
IMHO, CFA program is a very solid introduction to finance. But it is only a beginning (sorry for the CFA candidates), working experience and reading financial history books and off course other books about investments is mandatory.
 
ohai wrote:
Alladin wrote:
Click to expand...
Really? I found the CFA program to be pretty shallow. Sure, it’s a good introduction to a wide range of topics, but there’s no way the CFA curriculum has enough depth to give someone a real opinion about capital markets.
In general, I think adding financial history is a good step, but that alone is not sufficient. There needs to be more specific discussion about why financial models like CAPM fail in real life. And of course, these deficiencies need to be addressed systematically in practice - which is more of a role for companies, not an educational organization like CFA.
Click to expand...
Agreed. That is why i said CFA was a comprehensive introduction to the field. The programme is pretty much known to be one inch deep and one mile wide and was not meant to be more. Candidates who are in the indudstry and/or are otherwise serious about understanding more about the field probably use the syllabus as a broad jumping board to launch them into a particular direction as opposed to holding up the cfai books as a poster for success. In principle,I am in favour of adding financial history into the programme and having a more detailed discussion of how/why beloved theories of econ&finance fail. In practice one would needs to think about (1) passing the exam and (2) trading off some rigour in favour of a more memory-based-history-lesson.
If I had ten pages to fill in one of the CFA books..would i want to see them filled with a piece of financial history that (1) will be examed,(2) can be easily found on wikipedia/ other sources in the 21st century…or would i want them filled with information that I will not easily find/understand in another perhaps disjuncted context ?
Financial history,as important as it is, should not become an integral part of a professional finance certificate simply because
  • with the ease and low cost of information access,history lessons can be learned fairly easily if you are interested enough.
  • it lends the programme with an even greater sense of rote-memorisation
  • past trends cannot be extrapolated to the future
Anyone serious about the field would pick up a relevant book from Amazon anyways…perhaps nial ferguson (or whatever his name was).
I remember at uni one professor told us that a degree is simply a collection of reading lists and somehow to me the CFA programme is the same.
…sorry if this didn;t make sense…just woke up and had some black coffee on an empty stomach..eugh
 
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