Rising above the gathering storm from Helsinki

Islam Zween, Argaam CEO

In a conference room in New York, a group of top Wall Street analysts had gathered as they exchanged a wary glance and watched closely Apple’s business strategy analyst Horace Dediu’s presentation of financial statements on a company under coverage. It was a crucial research and investment recommendations phase for Apple Inc.

Everyone was also wondering: How on earth could another company; namely Nokia, that had the lion's share in the telecommunications industry back then in 2007 face a serious risk that could jeopardize its future? 

Between the staggering numbers and flashy percentages, the little details Dediu noticed seemed to align with another shrewd financial analyst named Ben Wood, who impressively spotted signs of an alarming slowing innovation and a delay in adapting to rapid technological shifts.

In Helsinki, the party was lively and the board of directors appeared overconfidently optimistic as the CEO proudly announced Nokia’s financial results, unaware that a careful analysis on the other side of the Atlantic ocean was beginning not only to reveal a completely different story, but rather a warning of a looming storm that everyone but the parent company could see picking up steam on the horizon.

When Nokia decided to dual-list on the New York and Helsinki stock exchanges, the goal was to broaden its investor base and increase transparency. But the listing, which required the disclosure of more high-quality financial and operation data, not only revealed the company's real brand strength in the mobile phone industry against a rising star, but also highlighted challenges ahead.

What were just numbers in earning reports turned into warning signs when read by seasoned Wall Street analysts. For the first time, investors and analysts were able to move beyond traditional data, such as revenues and earnings, to a deeper analysis based on strategic performance indicators and market shifts.

While Nokia believed that increased disclosures would boost market confidence, the Wall Street reports revealed the shortcomings of its competitive strategies. This dual listing gave analysts access to a deeper understanding of the data, enabling them to read it correctly and warn investors of a coming storm that would hit the company's shares, just when Nokia was thought to be on a path of sustainable success.

The problem wasn’t about the quality of Nokia’s data, but rather about the misinterpretation (or improper use) of the data by its own analysts. 

It could be also a case of survivorship bias, which occurs when an individual mistakes a visible successful rival, while considers only the ‘surviving’ observation about the firm because of different kinds of data biases; chiefly the selection bias, while ignoring those red flags and data points that didn’t ‘survive’ his/her own observation.

To Nokia’s surprise later, Apple Inc. came to revolutionise the world of telecommunications becoming in 2018 the world's first company to record a market capitalization of $1 trillion and roughly two years later became the first publicly traded US company to surpass $2 trillion. At the writing of this article (on August 28, 2024), its market cap exceeded $3.4 trillion.

In Argaam, we have pledged from day one to be extremely cautious about the data quality problems, including the most common forms: biases, missing values, discrepancies and changes in historic data.

We aren’t only tracking and analysing the declared data by firms, but also keep a close eye on the financial and stock news that increases the rationalisation of the decision-making process for investors and economists, with a rigorous fact-checking policy in a social media world that could be manipulated by misinformation, disinformation and of course rumours.

We should be modest in our assessment of the data. Always remember the example of Nokia, where overconfidence in data and overestimating a company's potential can lead to negative outcomes. This alerts us to the tragic flaws that resemble the protagonists in Shakespeare's plays, whose tragic flaws remain relevant to our modern world. Overestimating capabilities and being overly optimistic can blind us to fatal errors and data issues, making it difficult to see the signs of issues that could lead to a catastrophic investment failure.