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From the plethora of designations that you might see affixed to the name of your financial advisor or a portfolio manager, the CFA (Chartered Financial Analyst) and the CMT (Chartered Market Technician) are arguably the most rigorous and exacting designations to acquire in their respective fields of study, fundamental and technical analysis. Both the CFA and CMT curriculum’s span a broad range of topics and principles in their respective fields that require passing 3 exams to acquire the designation. While we could go on about the time commitment and grey matter required to be able to have those 3 letters by one’s name, the following interview is more about the differing expertise bestowed upon the holder of a CFA or CMT designation as a participant in the capital markets. Drawing from his knowledge and experience as a Chartered Financial Analyst as well as a Charted Market Technician, our next interviewee takes us through what each designation could bring to a financial advisor or portfolio manager when it comes to making money in the capital markets.
Biography: Samuel Beaudry started to study the market behavior in the midst of the 2000-2001 market downturn. Since then, he has done many studies on technical indicators, and he has programmed, customized and optimized many of them for proprietary purposes. Samuel Beaudry worked as a technical analyst with Ron Meisels, president of Phases & Cycles Inc. He also held different positions at firms such as National Bank, Thomson Reuters Canada and Swift Trade. Samuel Beaudry has a Bachelor degree in International Business Administration from Laval University in Quebec City. He is also a CMT (Chartered Market Technician) and a CFA (Chartered Financial Analyst) charter holder. Sam is currently working for a company called Integrated Financial Management Inc. which subcontracts on various projects. One of Sam’s current main projects is with the Canadian Society of Technical Analysts for which he is the Business Director.
Q: Mr. Beaudry, there exist a number of designations that certify individuals to be financial advisors and portfolio managers. In your opinion what does the CFA designation bring to a financial advisor/portfolio manager? Given the breath and detail of the CFA exams do you think CFA charter holders are better equipped to be portfolio managers for mutual/hedge funds rather than be investment advisors?
A: The CFA gives a good base knowledge of pretty much everything that exists in the financial field. For example, you learn how to read financial statements correctly, you learn what stocks, bonds, options, futures and many complex investments are and you also learn how to price them all.
The ethics part is also an important component of the CFA curriculum. Using examples, they show you how to have good judgment in the face of complex ethical situations regarding investments. For example, you should not trade a stock before buying the same stock for your clients. You should also not trade on non-public material information like confidence expressed by a director of a publicly traded company, since you would get an unfair advantage over other market participants. These examples seem simple, but there are so many complex situations that could arise and you need good judgment to take the best ethical course of action.
If you know that a person is a CFA charter holder, it usually gives you at least a good idea about his base investment knowledge and ethical level. However, it will not guarantee you that he can make money with your investments. This is never guaranteed.
I would not say that CFA charter holders are necessarily better equipped to be portfolio managers for mutual/hedge funds over investment advisors who may have taken another route to get certified.
What you need is good knowledge of the financial markets at first. It is possible to gain this knowledge in other ways, one is through experience. You then need a person with good character and ethical judgment.
Once you have that, you then need a person with a sound investment plan. How does he select investments? When does he get out? You should also question him about what his performance record has been in both up and down markets relative to his benchmark. Isn’t that what you pay him for?
Q: At the other end of the spectrum, Mr. Beaudry, what exactly is the CMT? What is at the heart of this field of study? In what ways does the CMT designation equip a person to be an investment advisor/portfolio manager?
A: The CMT is the Chartered Market Technician program. It is a program given by the Market Technician Association (MTA), based in New York. Here in Canada, the CSTA (Canadian Society of Technical Analysts), which has close ties with the MTA has the same purpose, which is:
“To promote Technical Analysis at both academic and professional levels, through education and the sharing of knowledge with the community of technical analysts and the investment industry, and through the establishment and fostering of the highest standards.” (CSTA)
Technical Analysts (or technicians) study the price action of a stock, ETF, commodity, bond or an indice. They also study other technical data such as open interest, volume, sentiment data, cycles, etc. There are many techniques that you may use but it is hard to cover them all here so let’s stick to the price data.
Technicians usually study the price data on a chart, and complement this analysis with indicators (which are mathematical formulas derived from the price data). One simple and well known indicator is the moving average. For example, a 40-week moving average sums the closing weekly price of the previous 40 weeks and divides this number by 40. It is called “moving” because at the end of each week, the indicator will remove the oldest data (i.e. the weekly closing price 41 week ago) and replace it by the most recent data (last week’s closing price). With this indicator, you can have an idea about the state of the market. The market is usually in a long-term up-trend when the price is above its 40-week average and in a downtrend when its price is below its 40-week moving average. Please note that this is only one indicator. Technicians use a whole array of indicators to judge the status of the market and act on it. They also usually backtest their trading or investment strategies before implementing them. I would suggest any market participant to do the same regardless of the technique they are using. Do your homework’s first!
Q: While the CFA has gained widespread acceptance among professionals in the capital markets, there exists a large contingent of people that disregard technical analysis. However, since everything in the capital markets ultimately boils down to price which is ultimately driven by the balance between buyers and sellers, I reckon technical analysis can play a significant role in helping people find out whether they should be on the buy or sell side. What are your thoughts on this and do you think the CMT better equips individuals to be traders rather than investors?
A: Technical Analysis can be applied to short term, medium term or long term time frames. So a technician could act as a portfolio manager as well as a trader.
What investors, advisors, portfolio managers, hedgers etc. need in order to be successful with their investments is a structured plan, whether it is based on fundamental techniques or technical techniques, it does not matter, but they have to follow their plan religiously in order to make money successfully.
For those who are interested in technical strategies to invest in the market, reading books on Technical Analysis or by following the CMT program, will give you at least a couple of answers about when to buy a stock and when to sell it based on the price action.
Q: Mr. Beaudry, both the CFA and CMT fields of study teach students a number of different ways and techniques of analysis. As an analyst, investment advisor or portfolio manager, how do you determine which fundamental ratio or technical tool is the most apt for that particular asset/investment? How do you tell if the price to book ratio is more relevant than the price to cash flow ratio or whether the RSI reading is more important than money flow or Elliot wave theory?
A: It is very hard to have a clear cut definition of what is technical analysis and what is fundamental analysis.
For example buying the stock of a company that is buying back their shares is usually a good fundamental strategy because more money is left to the actual shareholders after the buyback.
It could also be a technical strategy because it could be analyzed historically with the price action of the companies who bought their shares back in the past.
Bottom line: You have to build an investment/trading plan according to what works best with you, whether it is technical, fundamental or a combination of the two. Just use the tools that work best for you.
By the way, just to add to the confusion about what is part of fundamental analysis and what is part of Technical Analysis, did you know that a small part of the CFA program discusses Technical Analysis? As I said, the CFA gives you a good base knowledge about everything that is out there in the financial field, but you will not become successful with your investment unless you build your own trading/investment plan.
A: Canadian investors who are interested in knowing more about technical analysis are encouraged to participate in activities of the Canadian Society of Technical Analysts (CSTA). The only requirement to become a member is to have an interest in Technical Analysis.
Two good introduction books in Technical Analysis are:
Both books are available to borrow from the CSTA library and can be shipped nationwide at no charge to members of the society.
On the fundamental side, I do not have any books to recommend aside from the CFA program.
Thank You, Mr. Beaudry!