CFA vs CMT

Matej Reisman CFA, CMT

My background is in investment banking and more specifically M&A advisory and restructuring so it was only natural for me to enroll into the CFA program. What is also unique about my situation is that I did the level I and level II of the CFA almost 20 years ago and only completed level III in 2022.

Level I of the CFA is focused on definitions and broad concepts related to economic analysis, accounting, finance, asset management and valuation of different kind of assets. Level II is probably the most demanding as the amount of material on accounting and asset valuation (bonds, stocks, options, futures) is extremely large. Level III which I did after 20 years of work experience to me was a delight and I really felt that I did not just study the subjects but actually understood in detail how to apply the knowledge. At level III the candidates learn a lot about portfolio theory, how to prepare investment policies and programs for different institutions and individuals as well as how to measure performance in different ways, what sort of alternative asset management strategies exist, etc.

In short the CFA is the gold standard for anyone looking to gain deep knowledge of fundamental analysis, asset valuation and how to not do unforced errors in asset management. What the CFA, however, does not teach you is how to be an excellent asset manager.

Lets for example assume that you have identified a stock that you think is undervalued. You are a CFA and it makes a lot of sense to invest in it as the theory says that the market over time will recognize the gap in value and you will profit from the reversion of the price to the “fair value” which you calculated through your analysis. But is this really the case? What will the catalyst be for this reversion? What, if the price drops by 30% once you bought the stock? Are you still going to hold on to it?

Another example would be that you are working at a central bank that decides to buy foreign dollar denominated bonds. They have the right duration and rating… So are they going to drop in price or rise? Are there better alternatives?

Simply put the CFA while it gives you the tools as an analyst does not teach you how to be a good investor who seems to be “at the right side of price swings”.

That’s why I am elated that I found the Chartered market technician program – if you hold the CFA charter you just have to pass level II and level III of the CMT in order to then get the designation.

The CMT program in contrast to the CFA does not focus on fundamental analysis and asset allocation but rather on the behaviour of investors, price action, practical risk management, intermarket analysis and the development of objective systems for trading and risk management.

When people hear of technical analysis they will often know that it involves looking at charts and based on patterns tries to predict in which direction the price will move.

Although true to some extent the statement does not capture the full extent of the discipline so I will try to do it in my own words in a few sentences. The main assumption behind it is that the behaviour of people does not change over time, which means that we will see the same things happen in the markets over and over again. The second assumption is that the price will reflect facts faster than we can get to them. This means that, if a price is falling there is a reason for it. The amount of different investors around the world is huge and they are all trying to make money. So probably there is always someone that knows more about
what is going on than we do and the price will react to stuff we are not aware of at the time (e.g. no stock that is rising in price has ever gone bankrupt; normally the price starts falling well before). The third thing that technical analysis teaches you and I find important to point out is that it is more important not to lose money than it is to earn it. This means that you cut your losses short, you do not add to losing positions, you adjust your views in accordance to what is happening, you try to earn as much as possible in as little time as possible, etc.

The problem with technical analysis in general is that people learn a little bit about it online from questionable sources and then pretend to be very knowledgeable about the markets. By getting the CMT designation on the the other hand you are though all of the different aspects of it and how it can be applied in different situations, different asset classes and for different type of investors.

When entering into positions be it a commercial bank, fund manager, central bank, currency trader, commodity trader technical analysis can assist you in identifying the main trend and to time the market so that the chance of not losing money at the start or buying things cheaper is much grater than without the analysis.

It helps you to decide on the position sizes, risk limits, selection of individual securities based on objective factors such as momentum (how fast they are moving), their movement against other securities, etc.

It allows you to scan the markets and create a holistic view of where they are going.

Also it teaches you to be systematic. Analyze set the rules and then follow them.

Last but not least it teaches you to analyze your emotions and what part they play in your investment performance.

So what is the difference between the CFA and CMT in one sentence. I would say that while the CFA helps you to get a job in financial institutions the CMT helps you to keep it as it is a lot more practical and gives you the self confidence to act. The markets can be timed and the benchmarks beaten although there is very few people that put in the time and energy it takes to learn how. It can not be done fast and it is not easy but having both the CFA and CMT will certainly put you in the top 1% of people having the chance to do it.

To finish I would like to stress that both the CFA and CMT adhere to the same ethics rules (CFA code of ethics) which is a great framework for what is allowed and what is not allowed for investment professionals.