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No. of Recommendations: 3
Gary,
you seem to be confusing market value with book value.

Book value can be a useful benchmark for investing. This is the "liquidation" value of the company. Value investors will often look for companies below book value, but they are the minority of the market. If you are looking at Breakers, you are extremely unlikely to find a successful one anywhere near book value, it is more likely with more mature companies. Tweeners will be closer to the book value, but shouldn't go near to it.

The thing to remember is that you are investing in an ongoing concern. If the company is a going concern, there is no way that you should expect it to be valued at book value- this would mean that you could not see it making any money in the future. I expect to invest in companies that will make money in the future. I am therefore willing to pay more to have a share of this future cash flow.

Now, just because the company has Tweened does not mean that it's growth has to slow down. A company can be a successful Breaker and be Tweened before the period of maximum growth rate. Tweening does not mean slowing growth. Now the question is this- how is it best to invest your money. Well, I would say that the best investments for returns are successful Breakers, but they are high risk and a lot of apparent Breakers fail. So, just because your company has been Tweened does not mean that you have a Breaker to invest in, or you may feel that you are overweighted in that sector. So, when the company Tweens, you have a choice on whether to sell or hold. If you hold, and it gets through the Tweener stage successfully, you will end up with a Maker, which may give you greater stability in the future. Now, if you believe in the company, why sell the stock, pay a tax bill on your profits, then invest in a Maker, when you could hold on and end up with a maker without paying tax in the meantime?

The main stumbling block for many with Tweening is the crash, which can be 40% and occurs when it is seen to be Tweened. The problem is knowing when this will be. If the company has already gone through the drop, it makes sense to me to hold if you believe it will become a Maker. By following the financial story, you will see if it is on track.

As to whether to invest fresh money in a Tweener, I don't know. Personally, I would prefer not to, because if I didn't have faith in it as a Breaker, then I would have less faith in it as Tweener, so I would rather sit back and wait for it to demonstrate Makerhood. After all, this is one of the most dangerous parts of the Breaker/Maker story, more unpredictable than the other 2 parts. As tax considerations are not a factor, the reasons for having the stock in your portfolio are less since the risks are the same as if you held it from Breakerhood but you have no tax considerations to sway you at all.

Now, the thing about management is that they decide upon allocation of capital. The reason to use capital for dividends or stock buybacks is that they have no better way to invest, e.g. by returning the funds to the shareholders, the shareholder will benefit more than by retaining them. Now, if we assume that the shareholders can expect a return of 11% per annum from the market, the directors are warranted in retaining the funds if they expect retained earnings to do better than this. Now, if the market is growing, the company is holding it's market share and as a result the return is greater than the market, surely they have acted correctly in retaining the funds? If they pay out the money but lose market share, the market will devalue them for underperforming compared to their competitors, thus you will actually lose by the lack of share price growth.

As for Tweeners building a beaurocracy and therefore being unable to compete, Coke was Tweened decades ago and yet their shareholders, until very recently, were quite satisfied, and, if Ivester can get his act together, or his successor, they should be again. G.E. has also been Tweened for a long time, and yet they have also produced some nice returns over the last 15 years or so.

I hope this helps a bit, I'm still learning myself, so feel free to rebut,

angussb.
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