Back in early December, I stated quite bluntly that Nokia (NYSE:NOK) stock had to do something to quickly earn investors’ trust or risk a serious hemorrhaging. At the time of my write-up, Nokia closed at $4.03. Following a brief blip higher, my warning became prescient.
On Jan. 11, NOK stock was trading hands at $3.87. It wasn’t down by much – only about 4% lower from the time of publication price. Nevertheless, shares were lower. Furthermore, the volatility wasn’t a surprise to me. As I mentioned in my article, Nokia shares was caught in both a long-term downtrend dating back to the Great Recession along with a nearer-term bearish channel.
Fundamentally as well, NOK stock wasn’t giving off great signals. As you know, telecommunications giant Huawei came under geopolitical fire due to the Trump administration’s aggressive China policy. Now, the shakeup with Huawei wasn’t a clear win for Nokia and other telecommunications-related firms; after all, very few companies are in a position to offend the Chinese.
However, I still argued that Nokia should have gotten something out of Huawei’s misfortune. Conspicuously, rival Ericsson (NASDAQ:ERIC) had fared much better during this period. Combined with management appearing to use the novel coronavirus pandemic as a crutch for its missteps, many investors grew tired of NOK stock.
But then, you know what happens next. Thanks to a collective of retail activist traders on Reddit and other social media platforms, they took short traders of Nokia shares to ask, bidding up NOK to ridiculous heights.
On Jan. 27, Nokia stock found itself at $6.55, up a staggering 38% from the prior day’s session and up 68% for the year. Suddenly, I was looking the fool for being so cautious on NOK.
However, as these things usually end up doing, the air got deflated. And while the bubble can reinflate, you probably should avoid it.
NOK Stock and the Failure to Understand Free Market Capitalism
Peruse social media posts about NOK stock or any other of the so-called meme stocks and you’ll find no shortage of ad hominem attacks on bears. This complete misunderstanding of how the equities market works is one of the biggest threats to Nokia’s stability.
Indeed, the misunderstanding goes deeper than misinterpreting the role of short selling. It really stretches into an attack on free market capitalism. In other words, whether they know it or not, these social media Wall Street warriors are basically communist sympathizers.
Why do most communist countries fail? While economists and historians will point to various factors, I would argue that they crumbled because governments attempted to protect their people and societies from failure, much like helicopter parents do anything and everything to protect their children from pain.
You know what happens to those kids? Usually, they become messed up and it’s because failure, pain and struggle are components of life. You can never grow, you can never succeed without the threat of falling short. Otherwise, there’s no point in trying.
Further, this communist approach to stock market trading – apes together strong – creates the very desperation that supposedly these social media traders wanted to impose on billion-dollar hedge fund managers. Because as NOK stock (or whatever meme stock) soars, at some point, people want to take their profits.
And they should because these meme stocks are often tied to failing companies.
Well, there’s a reason why only a few people can summit Mount Everest at a time – there’s just not enough room at the peak. Therefore, what ends up happening is that the most wealth gets siphoned into the fewest number of hands.
The only difference this time from other market peaks/crashes is that bag holders are now concocting a story – diamond hands – to rationalize their losses and convince others to do the same in the hopes of sparking another big rally.
The problem with that approach, of course, is the law of diminishing returns.
You Can’t Cheat the Yin and Yang of the Stock Market
You can think of diminishing returns this way. If you’re caught in a crunch-time scenario, you can eschew sleep for work or whatever you need to get done. And that might get you out of an acute bind. However, if you keep doing it, at some point, the lack of rest will catch up to you in a bad way.
Does this mean I hate work? Absolutely not! But good rest and relaxation is actually a critical factor in making work productive and sustainable. Again, if you keep ignoring good sleeping habits, you’ll eventually crash.
Why would the markets be any different?
By having constant negotiations between bulls and bears (and thereby implying ample liquidity), a stock like Nokia can grow in an orderly and sustainable manner. In this way, it’s a positive-sum game – everybody can benefit a little bit over time.
But by stretching the natural rhythm of the markets – all bulls, no bears for instance – you end up creating boom-bust cycles. And the more unnatural the manipulation, the more severe these peaks and valleys, which create an extreme zero-sum game: a few people win and lot of people lose.
Banking on such a dynamic is tricky to say the least. Therefore, if you’re not a gambler, I’d stay away from NOK stock for the time being.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.