The WRONG way to approach test questions

If you don't have our ExamCram Online Test prep for the Series 65 or 66, get it. Be sure to work the Power Quizzes, too, which is where the newest questions show up first. As you work through practice questions, try to avoid a common tendency that I just noticed again this morning. First, let's look at the practice question my customer is determined to get wrong:

Which of the following investments is exempt from the anti-fraud provisions of the Uniform Securities Act?
A. Treasury note
B. Federal covered security
C. Whole life insurance
D. None of the choices listed

My customer is convinced that "nothing is ever exempt from the anti-fraud provisions of the Uniform Securities Act." And that is almost true. However, if the thing in question is not a security, then it IS exempt from everything contained in the Uniform SECURITIES Act. Is whole life insurance (or a fixed annuity) a "security"? No. So whole life insurance/fixed annuities are exempt from the anti-fraud provisions of the Uniform SECURITIES Act. A T-note and a federal covered security are still securities, so even though they don't have to be registered, the people who sell them are subject to anti-fraud rules. Mislead me when selling IBM or a T-note, and you are subject to anti-fraud rules.
Why didn't my customer just pick "C"? Because he doesn't want to cooperate with the question. Rather than play along, he decided that whole life insurance is not an investment; therefore, the answer is D.
Hmm. If the question says "which of the following investments . . . " you can safely assume that it's not an arguable point whether all choices are investments--they are. Even if you wanted to make the argument, how could you? Where do you find the definition of "an investment" in any of the securities laws you've had to study? Is a fixed annuity an investment? I think so. Is it a security? No. Is a house a security? No. Is it an investment? Many people would say that it is.
But, why are you arguing? There is no one at the testing center with whom you can argue. You have to play along with the questions, or come back and try it again in 30 days.

Figure it out, people!

Far too many license exam candidates labor under a misconception about the exams; they think they are supposed to know the answer as soon as they read the question. Unfortunately, for most questions, your job is to FIGURE IT OUT. For example, take a look at the following:

Parents often use zero coupon bonds such as Treasury STRIPS to fund future educational needs. Which of the following is an inaccurate statement of such investments?
A. they lock in a rate of return for the life of the bonds
B. taxation is deferred until maturity
C. their market price volatility is higher compared to interest-paying debt securities
D. they require lower capital commitments

Maybe you already know the answer, but your approach should be to take each choice and try to eliminate it--the choice you can't eliminate must be your answer. Also, it helps to remember that you're eliminating the three TRUE statements in this one. Right? Ok, so do zero coupon bonds lock in a rate of return for the life of the bond? Don't try to picture an imaginary flash card here--ask yourself how zero coupons work. Why are they called "zero coupon" bonds in the first place? Because they make exactly zero coupon payments--therefore, the investor does not reinvest coupon payments at varying rates along the way (reinvestment risk), so I guess the return is "locked in for the life of the bonds." See how much thought it can take to eliminate just one answer choice? Good--two more need to be eliminated, and then we're done. Taxation is deferred until maturity--is that true? Many people have memorized this, but even if so, don't choose this answer yet. Not until you eliminate the other two. Put this one on hold--it looks good, but maybe one of the other choices looks even gooder. What about the "market price volatility," does that make sense? Well, if you remember all that we've said about "duration" and how zero coupons have high "durations," you know it's true. If you don't remember it, figure it out--why would their price be volatile? Probably because there's no cash flow being paid to make the investor feel better about holding the thing. That's true, so we eliminate it, and we sit 50-50 at this point. Either B or D is going to be our answer--getting tired and frustrated? Suck it up, people--you have over 100 questions to answer whether taking the Series 65 or 66. Okay, Choice D says that zero coupon bonds somehow "require lower capital commitments." And here is where we separate those who will pass the first time and those who might pass on their second or third attempt. The candidates who get frustrated now and start preparing their snarky email to Kaplan, STC, or Pass the Test, want to start squirming like a little kid all dressed up for a 3-hour church service on a hot Sunday in August--no fair! I don't remember ever seeing that before! Is this test testing my knowledge or my ability to take a test?
Yes, and yes--the clock is ticking; what is your answer?
Take a deep breath and t-h-i-n-k about it. Why would the zero coupon require a lower capital commitment? Well, how are they purchased? At a deep discount to the par value--aha! If you can buy $100,000 par value of STRIPS for just $50,000 or $60,000, I'd say that represents a "lower capital commitment," whether I've ever thought of it that way or not. Choice D is eliminated, along with Choice A and Choice C. What's the right answer?
I just told you. It's not A, C, or D.

If I seem to be getting a little edgier, it's because 2010 represents a whole new reality, what with the 72% required passing score for the Series 65 and the even scarier 75% passing score for the Series 66. I can't afford to be nice at every turn this year. My job is to scare exam candidates sufficiently to take this stuff seriously and start thinking through exam questions as opposed to expecting to have them memorized as you used to do in high school and blow-off college courses.

Frankly, the harsh, cold January weather here in Chicago is making my job a little easier.

Test-Taking Strategy, A Facebook Confession

Facebook has been a great thing for me so far. I can place links to these blogs and other websites, and I can also update my status with "Robert is blogging for his Series 65 students at 5:30 on a cold morning in March," in order to mention my business as often as possible. Another connection to the business comes from all the quizzes that I receive from my old high school friends challenging me to "name that 80's band" or "name that 80's tune." I'm flattered that they think of me as someone to challenge to a quiz, and I also see an opportunity to put my test-taking strategies to the test. The first quiz I took was called "name that 80s band," and I have to admit, I was a little nervous. The first question had me up against the wall--it was a picture of a heavy metal band, and that was really not my forte. I actually thought of my customers at the testing center panicking over the very first question. In honor of them I took a deep breath and said, what are the four choices? We had: Scorpions, Black Sabbath, Dio, Judas Priest. Wow--talk about an advantage! Okay, first, the difficulty level of this facebook-based quiz can not be that freaking high; they would not put a picture of Black Sabbath here unless Ozzy were clearly visible--Sabbath was eliminated. A Judas Priest photo would have to have at least one guy on a motorcycle or wearing motorcycle garb, so Judas Priest was eliminated. Now I'm down to Dio and the Scorpions? What's the name of this quiz? "name that 80's band." Who was a bigger force in the 80's, the Scorpions or Dio? The Scorpions--I win. I now have a comment on my "wall" from the friend who sent me the challenge after seeing the score of 100%. He wrote, "How on earth did you know the name of the guy from the Split Enz?" Of course, I didn't. I just eliminated the wrong choices and then asked--who was a true "80's band"? And, what would this test want me to say? I also just got a 100% on a "name that 80's tune" challenge. On the first 9, I simply knew the answer. But I would have only gotten a 90% if I had not used process of elmination on the last one, avoiding "The Bangles" and choosing "Debbie Gibson," not because I have a clue what Debbie Gibson actually sang or looked like, but because "The Bangles" had one or two hits, and the title of the song in the question wasn't one of them. Always use the multiple choice format to your advantage. Always focus on eliminating wrong answers to improve your odds. Never indicate "single" for your facebook status unless your spouse has a really good sense of humor.

Test-Taking Strategy

You have to use whatever advantages the exam gives you. The test does not involve any fill-in-the-blank, short-answer, or essay questions. That means that you don't have to use the more difficult skill of recall. You only have to use the much easier skill of recognition. Of course, the exam can use lots of synonyms, so even recognition will fail you on some questions, which is why you have to resort to process of elimination at that point. If you don't see the word you were hoping to see among the four answer choices, you can use logic and reasoning to start eliminating the wrong answers. You might only eliminate two answer choices, but that raises your odds from 25% to 50%. And, if you only have to use this method of extreme test-taking on, say, 50 questions, you'll probably get 25 or more of them right, and that is often the difference between being among the 66% of candidates who pass the test that day and the 33% who wish they had.
Of course, we now have to apply it to a potential exam question:

Which of the following types of contractual provisions may exist between an adviser and a client?
A. waiver of compliance
B. exculpatory provision
C. performance-based compensation for certain institutional investors
D. none of the above

Wow, maybe it's the earliness of the hour, but I was just hit with a flash of recognition myself--these exams bite! No wonder some of you are a little cranky. Anyway, we still have to use the advice given above to try to gain the upper hand on this question. A "contractual provision" just means that an investment adviser has the client sign an agreement/contract that spells out what the adviser will do for the client, how much the adviser will charge, how they figure that charge, whether the adviser has discretion to place trades, etc. In that contract, can an adviser have the client sign a waiver that allows the adviser to do something that does not comply with securities rules and regulations? Probably not, right? So, we eliminate "A," waiver of compliance. What if you don't know what an "exculpatory provision" is? You might be in trouble. Or, you might be a creative and analytical thinker who says (quietly at the testing center, please), "Well, 'culpability' has to do with blame or fault. 'Ex-' means without. So the adviser has the client sign a provision that whatever happens, the adviser is without fault." No way. So, we eliminate "B," exculpatory provision. Now we either determine that "C" is okay, or we choose "D."
Careful now. Too many people feel the momentum now and jump straight to "D." We can't afford that luxury. Choice "C" is saying that it's okay to charge performance-based compensation for certain institutional investors. Is that true? Yes. Why would the test want us to know that the usual prohibition against sharing capital gains/appreciation is actually okay in some cases? It likes to see us sweat. Whatever its reasons, the answer is "C."
Exhausting, isn't it? Oh well. The Series 65 and 66 exams are just a weeding out process. They want to flunk about 33% of all test takers on any given day. Of course, many of those 33% come back in 30 days or so and join the 66% who pass. Brutal, yes. Frustrating, surely. And, as much as I've grown to hate the phrase, unfortunately, it is what it is.

Practice Questions step-by-step

As I mentioned in the previous post, your job is not to look for the right answer. Your job is to find and elminate as many WRONG answers as possible. Let's apply this strategy to the following question:

Which of the following can be determined by looking at a corporation's balance sheet?
I. EPS
II. net income
III. quick ratio
IV. shareholders equity
A. I, II
B. II, III
C. III, IV
D. I, II, III, IV

Step one, read the answer choices A, B, C, and D just to see how the little Roman Numerals have been distributed. Right away, you see that this question either has a "I" in it, or it doesn't. Once we make that decision, two answer choices will be eliminated.
Or, for the extreme strategists, notice that three answers have a "II" in it and three have a "III" in it. If you could eliminate either "II" or "III," then, you would be done.
I know, some of you are thinking--but that has nothing to do with learning the information!
So what? Neither does the friggin' Series 65 or Series 66. It's just a hazing ritual that the regulators use to keep a certain percentage of folks out of the business and, thereby, claim to be "providing necessary protection to investors."
It's a game, people. Play it with strategy, win it, and move on with your lives.
So, as an extreme strategist myself, I have to go for the knockout punch here. I'm looking at choice "II" and choice "III" first.
Choice "II" says "net income."
Hmmmmmmmmmmmmmmmmm.
Where would net INCOME be found? Perhaps on the other financial statement called the INCOME STATEMENT?
A-ha! This question is just a bully and is about to get its butt kicked. There is a balance sheet, and there is an income statement. Net income is on the INCOME STATEMENT, not on the balance sheet. So, let's eliminate any answer choice with a "II" in it.
Let's see, that eliminates Choice A, B, and D.
Leaving us with the right answer, C.

People who say they "hate the Roman Numeral questions" aren't using strategy. These so-called "multiple multiples" are, by far, the easiest type of question to answer. You just have to be patient and analytical.

Send in a hard Series 65/66 question, and I'll break it down for the community step-by-step.

Don't look for the RIGHT answer

When you're taking a difficult and confusing exam such as the Series 65 or Series 66, test-taking strategy is key. Most people try to read the question, then look up at the ceiling and try to picture the right answer, hoping to see it below when they finally look at the four choices.

Don't do that.

Your job is not to look for the right answer; your job is to eliminate the three wrong answers.
In fact, you might want to start reading the four answer choices before reading the question itself. This helps you to see where the question is leading and may, therefore, help you to eliminate the extranneous information.

I'll be posting examples of questions broken down step-by-step, but for now, try to apply this simple but important strategy of eliminating wrong answers. Even if you only eliminate two answer choices, your odds will at least be 50-50 on even the most difficult questions.

Send me an example of a "difficult" Series 65 or 66 question, and I'll break it down step-by-step for the whole community.