Some 50 years ago, Australia was gripped by a remarkable boom in...

Some 50 years ago, Australia was gripped by a remarkable boom in mining stocks, the most famous being the nickel producer Poseidon. Its share price rose from 80 cents in August 1969 to almost $280 by February 1970. In six months, the price of Poseidon increased by a factor of 350. What triggered a boom of such magnitude? The words of Charles Kindleberger (2000, p16) help set the scene.“A larger and larger group of people seeks to become rich without a real understanding of the processes involved. Not surprisingly swindlers and catchpenny schemes flourish.”How was the mania created?The initial movement in the Poseidon share price can be traced to changes in the market. By the late 1960’s, the nickel price was rising, driven by the growing demand for stainless steel used in industrial applications such as alloys and nickel plating, as well as from the aerospace and munitions industries. On the supply side, long-running strikes in Canadian nickel mines also exerted upward pressure on the nickel price. At the time Canadian mines accounted for around 60% of the world's production.Movements in the price of nickel directed attention to nickel miners and nickel explorers. Poseidon attracted the greatest attention. It had claims on a site at Mount Windarra, near Laverton in WA, some 350km north of Kalgoorlie. The stock was tightly held but even with the passage of time, it is difficult to be precise about the initial trigger to the start of Poseidon’s remarkable run.However, a headline in The Australian Financial Review on 30 September 1969 (p20) was spot on: “Poseidon Lures the Gamblers”The article author tried to introduce a cautionary note that the Poseidon price had trebled based on “very little evidence” and “the Board could not explain the sharp increase in the price”. This sceptical or cautionary theme continued, with later headlines referring to a “Mining Bubble” (October 1, 1969, p16) and comments that “Poseidon’s strike needs considerable proving up …” (October 2, 1969, p11).Further price rises in October were attributed to rumours of significant nickel strikes, again not verified by the company. Clearly, formal verification was not required. The price moves reflected optimism that Poseidon had a significant nickel deposit. Meanwhile, nickel prices continued to reflect the supply pressures brought about by strikes at the large Canadian producers, Faulconbridge and International Nickel.The reports of nickel shortages and Poseidon apparently finding high grade nickel deposits in Windarra continued to feed the frenzy in the Poseidon share price, rising from $6.60 to $38 over September and October 1969.Feeding the frenzySuch was the mania gripping Australian mining stocks at this time, the AFR (October 10, 1969, p1) reported the Sydney Stock Exchange was trading more shares (by volume not value) than Wall Street. It said that if you rang your broker three times and it was engaged the buyers were in, while if you got straight through, the sellers were in. An interesting heuristic, if not one lifted from a finance textbook. The AFR reported on October 14, 1969 (p14) “The bellhops are in …”By February 1970, Poseidon had a market capitalisation of $700 million, about three times that of Westpac’s forefather the Bank of NSW (Sykes, 1995, p279).When Poseidon released assay results it added to even greater madness. Poseidon reported an assay figure of 9.38% nickel to the London market, later corrected to 0.38%. Not a minor adjustment. Evidently, an experienced mining analyst would have known the initial report was wrong. Meanwhile, continued shortages in world nickel prices contributed to Poseidon share price increasing from $38 to $51 in November 1969.In a report that would be certain to raise eyebrows today, the AFR (November 20, 1969, p15) reported that:“Paper profits of more than $1 million appear to have been made in shares of Poseidon NL by an investment company associated with the consulting geologists who are evaluating Poseidon’s Windarra nickel strike.”Unsurprisingly, Senator Rae, Chairman of the Select Committee on Securities and Exchange, was critical of both geologists and stock exchanges for their lack of attention to insider trading.There were commentators highlighting the risk involved in Australian mining shares at this time. The geologist and director of the Geological Survey of Western Australia, Mr J H Lord, expressed a word of caution about the size of new nickel finds in WA (AFR November 24, 1969, P1). One British observer went as far to suggest organised rigging of Australian shares (AFR January 16, 1970, p1). Another, Mr Ian Wright a Perth Stockbroker (AFR 10 January p1) suggested that investors should start from the current value and work backwards to gauge what level of reserves are required to justify the current price.Wise advice largely ignored. Sound familiar?If such considered comments were not resonating with many investors, what was driving the market? To gain a sense of the times, the AFR (December 2, 1969, p2) comments are worth repeating in full,“Although word of Poseidon find at Windarra is generally credited to having been whispered first by drillers and equipment suppliers at the Leonora racetrack, the Palace bars soon got the message. And within minutes it was transferred again to the neighbouring office of Kalgoorlie’s only stockbroker, R. Reed, a member of disallowed of Perth.”The Palace referred to is a pub in Kalgoorlie, and not surprisingly, the AFR suggests many of the stories were seeded. The article goes on to report,“One geologist actually boasted recently that a word in the ears of 10 key drinkers in the Steak Bar could turn the place to a frenzy and cause a run on stock listed in Melbourne, Sydney and particularly Adelaide.”An AFR editorial (December 10, 1969, p2) said that the Australian stock market was more likely to rely on a call from the Steak Bar than a call to any control centre in Sydney or Melbourne. By the end of December 1969, the share price of Poseidon reached $200. On the way to this lofty level, the AFR (December 18, 1969 p6) links the increasing price to “rumours” and “unconfirmed reports”.Fingers pointed to the Palace Hotel in Kalgoorlie but it was not the only source of information. Trevor Sykes (1995, p101) reports one strong rumour “was that drillers had been seen in Laverton with sulphides on their boots and things”. With such insights, it is easy to picture a market driven by rumour and unverified reports. While the price was rising, it was easy to ignore the naysayers.Confirmation bias suggests investors will seek out information supporting their position. It may explain why undue emphasis is given to unsubstantiated rumours. Overcoming confirmation bias is not easy. It requires absorbing information counter to a position held. This leads to cognitive dissonance as information at odds with the position held is absorbed.The market finally tops outEventually, the price of nickel fell as world economy slowed. This reduced demand coincided with the end of strikes in Canada and an increase in potential new mines. In fact, as Trevor Sykes mentions, even if the quality of the nickel was of an economic grade, Poseidon could not raise the funds to develop the mine. (Sykes, 1995 p200). So, with the nickel price falling and a more realistic evaluation of the mine’s prospects, the Poseidon share price began its decline.By April 1970, the share price had fallen to $72. Its fortunes continued to decline and Poseidon was delisted in 1976. The Windarra mine was taken over by Western Mining and closed in 1994. In 2006, Niagara Mining acquired the Windarra mine and in 2007 changed its name to Poseidon Nickel, so the famous name lives on and is currently trading on the ASX at just over 4 cents.In his report, Senator Rae found “the present regulation of share markets inadequate and ineffective” (SMH, July 19, 1974, p1) and he was critical of the geologists and stock exchanges. He found self-regulation had not worked and there was a lack of investigation into insider trading. He found geologists were sellers of certain mining shares when they had a better understanding of the prospects than the general public. Senator Rae found:“reports and statements by the directors and geologists were evasive, distorted, exaggerated and simply untrue in important respects”After the report was released, the Sydney Morning Herald (July 19, 1975) reported Senators Rae’s wife had been threatened. The SMH reported a radio interview given by Senator Rae’s wife on ABC radio where she declared “they would have been very comfortably off if they had accepted bribes to provide content of the report before its release.”It is true the Rae Report was damning, however Trevor Sykes (1995, p322) believes it would be wrong to label the main participants as thieves. He described them as optimists and gamblers as they bought into the story they helped create. Perhaps a quote attributed to Leonardo DaVinci captures it best. “The greatest deception men suffer is from their own opinions.”From 80 cents to $280 and backWhen we reflect on the movement of Poseidon shares from 80c to $280 in six months, it is easy to dismiss it as the workings of an immature and unsophisticated market. Yet in recent memory we have had speculation, among others, in dot com companies, Japanese equities and bitcoins. Maybe certain tech stocks currently listed in Australia deserve the same label. The changes introduced following Senator Rae’s inquiry have been important in shaping the regulatory framework of Australian securities markets. However, it is difficult to regulate human nature. When apparent easy gains are there to be made, rational investor behaviour is often jettisoned. Speculative booms can be fun at the time, but like any party, there are no quick and easy hangover cures. Keith Ward FFin is a former Head of Retail Banking, St George Bank. This article is general information.