Financial Statements? Do We Really Need Those?
How understanding Financial Statements prevents making bad mistakes.
Pretend for a moment that there is a company with an obsolete business model that has been losing money steadily over the past 5 years, while at the same time seeing its revenue from sales decrease significantly. Suddenly, and without warning, the company stock price skyrockets, doubling within just 90 minutes and continuing to stay at a price almost 10x where it was just a couple of weeks earlier.
In response to this sudden and unexpected price increase, amateur investors rush to buy stocks in that company, as well as other companies that they have haphazardly thrown into the same category of “underrated underdog.” At first, most of the amateur investors think they’ve struck gold and start celebrating:
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