Poseidon Bubble in the Australian Stock Market
During the 1970s, nickel was in extremely short supply in the world. This is because Canada was the largest supplier of nickel and there were certain supply issues with the Canadian nickel. On the other hand, the demand for nickel was booming given the Vietnam War which was underway. Therefore, as a result of supply and demand acting in the opposite direction, the prices of nickel shot up in the global markets. This sudden and exponential rise in the price of nickel was what ended up creating the Poseidon stock bubble in Australia.
Poseidon NL Finds Nickel
Poseidon No Liability (NL) was a company that was listed on the Australian stock exchange. The company was unremarkable and had displayed poor results in the past. This was the reason that the shares of Poseidon were trading for as low as $0.80 per share.
In 1969, the media declared that Poseidon NL had located major nickel deposits in Western Australian region and had acquired control over it. This led to a mania in the stock market and Poseidons lowly prices stock doubled in value overnight! Within the first month, the stock began to give returns which were in multiples of its meager price! Investors became millionaires overnight.
This was in stark contrast with the fundamentals of mining business. The mining business was a slow moving and risky business. The returns are highly uncertain until a very detailed study is carried out. Also, once the returns have been ascertained, the projects take years to execute and the gestation period is very long.
Therefore, even if Poseidon had struck a major nickel source, there was no reason for the prices to go flying through the roof. The bubble could have been recognized by the fact that nobody including the directors of Poseidon NL were aware of exactly how big this nickel discovery really was. The best ball park estimates were just wild guesses as there was no detailed study available which backed the tall claims made for a very long time.
The Bubble is Formed
The above factors did not stop investors from becoming excited at the prospect of making a lot of money. Not only was the Poseidon stock skyrocketing, but just about any mining company became the darling of investors. This is because speculators were assuming that the entire Western Australia region was a rich source of nickel and any company that could acquire control of land over there was bound to make money in the long run.
Any mining company that had a lease in the Windarra region suddenly became sought after. Companies that merely expressed the fact that they had the capital and the intent to obtain a lease in the region were also being funded. In the end investors that operated in such risky concerns were the ones that ended up losing the most.
The shares of Poseidon had risen to a staggering 125x in value and crossed $100 per share mark, even though months before they were trading at a measly $0.8 per share. Later, the Poseidon share came close to the $200 mark and some brokers had an astronomical target price of over $350 on the Poseidon stock.
The Sudden Fall
Soon the markets realized that the entire activity was speculative in nature. Investors, who had been buying on the hope of finding a greater fool, lost all hope. The market was basically driven by multiple false assumptions.
The first assumption was that the price of nickel would remain high. It was clear that the price spike was being driven by temporary events like the Vietnam War and the shortage of supply in Canada. As soon as any one or both of these situations resolved themselves, the boom would just disappear.
Secondly, to justify the staggering price rise, the Windarra region had to be rich in ore and all the ore had to be of high quality. Soon, as detailed studies were carried out, reports to the contrary came in. This led to plummeting investor confidence and the process of return to sanity in an extremely overheated market began.
Lastly, mining was an extremely long term business and if the time value of money was taken into account, the valuations made absolutely no sense at all.
Investors realized that it was just temporary positive news that was driving the markets and as soon as negative news started pouring in, a fire sale began. People who had queued up to buy Poseidon stocks just a few months back were now lining up to dump the same. The market was flooded with stocks of all mining companies and there were literally no buyers. Poseidon stock plummeted back to its original worth of less than a dollar. Fortunes that were made overnight ended up being wiped out overnight.
Mayhem ensued in the Australian markets after Poseidon crashed. The Australian government was propelled into action as bitter investors started blaming the government for the lack of regulation present in the market. The government responded to the public clamor by creating a better regulatory mechanism that would ensure that no more bubbles like the Poseidon bubble were allowed to flourish in the markets.
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