How to be right. And still lose a lot of money
Located in Northern Arizona, USA, just west of the small town of Winslow (Pop. 9500), is a crater.
Around 50,000 years ago, give or take, a meteoroid measuring approximately 50 m (165 ft) in diameter and weighing 500,000 tonnes, collided with the Earth at the astonishing speed of 180,000 km/hr (108,000 mph), delivering the explosive energy of 10 megatons TNT and creating a roughly circular divot in the Colorado Plateau about 1,200 meters (3,900 feet) across and 170 meters (560 feet) deep. Annihilating itself in the process and leaving at the center of the crater a rubble pile close to 180m (600 ft) deep. To provide some perspective, six Mercedes-Benz Superdomes could easily fit side-by-side within its boundary.
This was not the collision of two equal Billiard balls of course - if it were you wouldn’t be reading this - the Earth is more than 100 quadrillion times bigger, but more like a musket ball hitting a freight train. Never-the-less, the impact generated a clack so loud it could be heard over the glacier sheets that covered Paleolithic era Norway and by jaguars lounging on tree branches in the Amazon jungle. Although the North American continent is believed to have been uninhabited at the time this ruckus undoubtedly caused quite a stir for the Mastodons, Hippidions, and giant ground sloths that roamed the area. Obliterating anything unfortunate to have been nearby into a pink mist that was on fire.
The powerful shock waves created during the impact caused the ground under the surrounding grassland to violently rise up creating a rim wall that today stands 45m (150ft), as tall as six movie theater screens stacked on top of each other. A meteor impact of this magnitude is rare and occurs roughly once every 750-1000 years so there’s little need to worry.
The formation of Meteor Crater went unnoticed (at least it went unrecorded) for millennia until the late 1800s when the westward expansion of the United States spurred the construction of railroads. The crews laying track were on the lookout for precious metals like gold and silver while trying to avoid sunburns, snakes, Indians and any hard obstructions that would require excess time and effort to clear. Crossing Arkansas, Oklahoma, the Northern part of Texas and New Mexico was mostly uneventful geologically speaking but as they crossed the plains of Northern Arizona, workers began to notice strange-looking, heavy rocks, some of them quite large and all as hard as their iron hammers.
A rail executive, whose name has been lost by history, mailed a sample to former professor turned mineral trader Albert Foote in 1891, who quickly identified it as a meteorite.
Around the same time, Grove Gilbert, chief geologist and interim director of the US Geological Survey, conducted a study on the crater located at the center of what was then known as Coon Mountain. Gilbert's study concluded that the crater was created by volcanic activity and he presented his findings at various conferences the following year. However, Gilbert was not entirely convinced of his own conclusion. Initially, he believed the crater was caused by a meteor - he went on to correctly that dimples on the moon were caused by meteor impacts. Gilbert reasoned that if the crater was caused by a meteor impact, a large mass of iron must exist buried underground. Such a large mass of iron would be easy to deflect a simple compass needle. But, after walking around for days, Gilbert found almost no magnetic anomalies. He then calculated the mass surrounding the crater and found it roughly matched the mass ejected from the crater itself. This raised the perturbing and inconsolable question - if the crater was caused by a meteor where did the mass of the meteor go?
Surely, a meteor large enough to create such a crate couldn't have just vanished (vaporized), right? Despite not wanting to accept the possibility of being intellectually unable to reach such a preposterous conclusion, Gilbert speculated the crater must have been created by volcanic steam ignoring all the strange magnetic rocks littered about around the crater and the complete lack of steam vents. It was a guess of a very educated individual, not based on the evidence but the inelastic nature of our already accepting understanding, that, of course, turned out to be completely incorrect.
Whether the crater was caused by a meteor or volcanism was purely a topic for academic argument and would be debated for many years to follow. There was at the time one undeniable fact: the United States was rapidly moving through its industrial age and the US needed iron. A lot of it. And, as it turns out, meteors are basically solid iron (and nickel). So whoever found the meteor, should it exist, would be rich. One man who really wanted to believe it did exist was Daniel Moreau Barringer.
By 1901, Barringer, a professional mining engineer, had achieved considerable success. He had made a sizable fortune from lucrative silver claims in the Commonwealth Silver Mine, located 520 km (320 miles) South of Winslow, in Pierce, Arizona. He was the author of two books on mining and he also owned a large house in a prime location in Philadelphia where he and his wife were raising their growing family. He had nothing left to prove.
Barringer had knowledge of the crater as it was not far from Commonwealth Silver Mine and he also concluded that the crater had been created by a meteor and that somewhere beneath the crater was 100 million tons of iron worth more than a billion dollars, discounting the venerable Gilbert’s compass. Most people disagreed with Barringer - namely everyone - but, he plowed ahead and leased the land around the crater and proceeded to spend the remainder of his life and all his family’s fortune trying to find the iron.
Here is the thing: Barringer was correct, just as Gilbert’s initial hypothesis was correct. The crater had been created by a meteor. But both men never saw the complete truth and Barringer, as much as he persisted, never made any money from the crate. The reason is simple. Both lacked one piece of information. Neither understood the impact’s physics. Almost all of the meteor had vaporized in the heat of the explosion, an idea that wouldn’t be described until 1929 and published in an academic journal ten days after Barringer’s death. The conclusion Gilbert couldn’t accept and Barringer didn’t want to believe.
Both men diligently came to two differing, yet both incorrect conclusions. Gilbert refused to consider the possibility of an event so violent that matter literally vaporizes so he constructed a fantastical reality - steam - something he could understand and then told everyone about this theory losing credibility to history. Barringer, blissfully unaware the possibility even existed, suffered a far worse fate. He forged ahead on his own, alone, ignoring all proffered advice and rational criticism of his theory, to his inevitable financial ruin. His legacy, or lack thereof, became the topic of a documentary.
Neither one ever thought to fire a musket ball at an oncoming train to see what happened to the musket ball.
Foote took the sample he was sent and sold it for a handsome profit never concerning himself with speculating over where the rest of the meteor got to. Making money is not always about being right or wrong. Sometimes it's about understanding where your ignorances are. Barringer’s ignorance were in collision dynamics.
A lot of people lose a lot of money in the stock market who are experts in some other activity. It’s a form of the Dunning/Kruger Effect. A type of bias where people feel the most confident at a subject when they are the least competent. A transference of confidence gained in one discipline onto another even if the skills learned have little or no relevance. A successful lawyer, dentist, restaurateur, often thinks they possess skills that translate and are applicable to the stock market.
A plumber would never walk into surgery and expect to be competent and gastric bypass, even though essentially a stomach is just a pipe that leads to a sewer; but this is exactly what most people do when it comes to asset speculation. The market is a complex system far more complicated than two astronomical bodies colliding. And, it doesn’t follow any simple mathematical relationships. There is no simple “shoot a billiard ball at a train” test analog either, even if you wanted to see what happens. The fact that money is ubiquitous in our lives exacerbates our folly here. Everyone understands money, right? So anything derived from money we also must understand. This is far from reality.
Speculation, as you have just read, is quite easy and a good way to end up broke in a giant pit in the desert, especially if you refuse to accept that your first thought might not be the most informed. The information Barringer needed was unhelpfully after his death. Though, we can’t be certain he would have read it anyways. A stock speculator doesn’t have this problem. The information is published quarterly or even more frequently.
A market participant just has to read it.