“So you’ll be responsible for the stairs?”
Looking at the blueprints, a door floating halfway up the wall doesn’t quite pop out the way it does in reality. Overconfident in the ability to YouTube my way through any project, I assured the Barn Yard that this would be no problem.
Once the building was in place, the five foot drop out the upper level was pretty glaring. Even sitting on the sill, you still had a decent jump down to ground level.
Stairs are complicated though. Building codes are very precise about how they can be constructed. You have a few inches of flexibility on the height, but once chosen all risers have to be within 3/8ths of an inch of each other. They can only be a few degrees off level, and that bias can only be ‘downward’ (i.e. the outer part of the tread has to be lower than the back).
Unphased, footings were poured, and stringers were attached. (With the appropriately galvanized hex bolts.) To fit with the rest of the stonework, I added cement board backing that will soon be covered in veneer stone.
Cement board isn’t particularly well suited to precise cuts though. While you can drill a hole in exactly the right place, or mush the footing in soft concrete to get true level, the jigsaw rips apart this crumbly backing board. Nothing is going to give you a clean cut here.
And that’s fine. There’s no need for a hero cut, I told myself. No one will ever see that line, buried behind stone and grout. There’s no value in doing anything more than an eyeball turn of the saw.
If you can’t tell, I’m spending a lot of time thinking about tools of all sorts. If I’m not building a backtest or wrangling market data, I’m in my overalls trying to finish the bottomless barn project. So the analogies will keep coming.
In either case, there are times that you absolutely have to be precise. And there are times where it doesn’t matter in the slightest.
Options market makers have to be precise about quite a few different things. The business here isn’t about buying on the bid and selling on the offer all day, nor is it about taking swings for the fences with a Soros sized pound trade. It’s competitively pricing inventory and liquidity risk.
The spread width is the standard error about price. You know there’s a fuzzy range around the valuation, and at the lower end of that range is where you’ll buy, and the upper end is where you’ll sell.
When markets are wide that error term is large - for everyone. That’s why ironically the best places to fish for mid-market or better fills is in liquid names. If you think you have some edge in a wide market - take it.
But with hundreds of names that trade less than a nickel wide, lots of pricing components have to be calibrated with precision. The markets are so tight that minor nuances of accelerated time decay or interest rates on corporate actions will cause you to make a bad trade.
Risk is uncertainty, and the most successful trading firms are absolutely precise about everything in their control. From operations through options pricing, the exact day the dividend gets paid really matters.
However there’s one important component that’s pretty fuzzy - sizing. In open outcry markets it’s usually given in round numbers, 10/25/100 up. No one offers 372 contracts out unless they know that’s the size of the order.
Electronically you have the benefit of an algorithm to calculate quotes, so a couple if/then’s will produce a more nuanced size appropriate to the market context. But even there, sizing is a blunt tool, with nowhere near the precision of the actual trade price. Being a maker of liquidity, size is what the counterparty gives you. You’re wasting your time being overly precise here.
On the buy side you get to pick your size. If you’re actively trading a portfolio of opportunistic strategies, this decision is critical for risk management. But it’s a similar judgement call, taking all the points of light in and making a subjective decision about how “good” this trade is. You can’t return a Kelly Criterion without some estimate of true value versus offered value.
On the investing side, size is pretty simple. It’s what you’ve managed to save. The fuzzy question is more specifically about allocations. Round numbers are common because there really isn’t a right answer for whether 60/40 should actually be 58/42. You do the best you can, and move on with the things that you can control.
It’s cliche, but you can manage your spending. More optimistically though, you can channel your efforts, and that helps produce income. The most reliable way to grow a balance is through bigger checks.
Regardless of how tight or loose you keep the belt, the real need for precision on the buy side is with objectives. Both fund managers and 401(k) jockeys need to be clear on their expectations.
Whether the client is you or someone else, the most valuable thing to deliver (besides the holy grail of pure alpha) is a value proposition that follows through from pitch to quarterly reports. There are a lot of different risk appetites out there, but none of them want chop when they were expecting smooth sailing.
It sounds like a fuzzy question, but the feelings that come from misalignment are painful and detailed. Your money is meant to work for you, and as the boss you have to tell it what to do. Knowing yourself is a precursor to that.
For individuals, investments are successful if they fund goals. (Maybe your goal is absolute performance, but I’d suggest something a little more meaningful.) You want to be extremely precise about how you define those goals, and what you’re willing to risk or tolerate to achieve them.
It’s not as scientific as optimizing the dividend tree to account for early exercise in high dividend paying stocks, but thinking through clearly each step of your objectives is just as important. The investment choices fall naturally once you’ve done that. Those have enough variance that a rough cut is fine.
No matter the project, portfolio, or business operation, there will always be components we have more and less control over. Know where you can and should be precise. Extract every amount of certainty about your emotional tolerance for risk. But a finger in the air is a good answer for a lot of questions.