The Risk of Risk Management

I’m gonna tell you a story.

One of my favorite clients was in a trade with me a couple weeks back, a long position in Couer D’Alene Mines ($CDE).  We had just closed out long-term and very profitable positions in both Silver ($SLV) and the junior miners ETF ($GDXJ) so we were looking for a new way to “stay in the silver game” a bit longer.  He’s an unabashed speculator and has been trading in the metals and miners since before I was born.

CDE turned out to be one of the most heartbreaking failed breakouts of my career.  Not that I had so much at stake mind you, it was just a ridiculously frustrating example of everything lining up and then Fate saying “fuck you”.

The short version is, we take a half position in the low 30’s, watching for a break above the 52 week high on volume.  Unlike SLW, CDE still had not made a new high since the spring of ’08, theoretically, this was to be the “big move” if and when it got through.  Sure enough, a big volume crack above 36 and we dutifully double our position.  Stop rolled up and we’re playing the house’s money.

And just when we’re riding “the next SLW”, disaster strikes.  Pan American Silver ($PAAS) gets hit on news of a dispute between the company and the crackpots who run the Bolivian government.  Sure enough, every miner with a South American interest gets whacked, every chart wrecked in an instant.  We spent 6 weeks stalking this CDE breakout and it was ripped to shreds in 6 seconds.

Anyway, my client’s under anesthesia for a surgical procedure while we lose the stock to the sell stop limit order we have in place.  He comes to and the first thing he wants to know is how his silver is doing (he’s a True Believer in the precious metals vs fiat currency story, by the way).  I tell him what happened.

“You dickhead!  You lost the stock?”

I am then hit with a Mauldin-worthy lecture on the inevitability of QE9 and what that entails for the New Zealand Kiwi-Krona and the whole spiel.

“You’re right, I am a dickhead I guess.  Didn’t realize how strongly you felt about your silver, maybe you should be going ‘physical’ after all.”

CDE is down 20% since then.  In like a week.

I can look back now and chuckle a bit only because I had the correct risk management in place, but initially it made me sick to have been taken out of the trade.  No matter how many times you’re saved by risk management, it always feels bad at the time.

Sometimes you gotta be a dickhead when you’re managing risk.  Another case where the “hard” thing to do is the right one.

P.S. That client can call me anything he wants, he’s still one of my faves 🙂