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> you seem to be confusing market value with book value.

Nope, I understand market and book values quite well, but I am afraid I am unable to clearly make my point :-(

I agree with everything you are saying about whether or not to buy a tweener vs a breaker and all that, if one is to look at it as an application of the "formula" of when to buy based upon Maker or Breaker criteria. The whole point of my orginal post is to question the underpinnings of the dogma you repeat next:

> 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.

These days, it seems most companies elect to retain funds for reinvestment in the business at a supposedly higher return than the investor would get otherwise. I am essentially trying to make two points:

(1) Doing so presupposes that the company knows what is best for its shareholders' money and what returns they would get elsewhere.

(2) Most importantly, this reinvestment supposes that the payout will be just that much bigger down the line.

While #1 should be obvious, it is #2 that is the underpinning of "New Era" style stocks.

Think of it like this. If I were to offer you a 10 yr CD that pays 20% interest and reinvests all of its dividends for maximal compounding, you might be excited and want in (a hypothetical Maker/Breaker stock). If I were to then try and slip a disclosure by you that said that the dividends in the 7-10 years would be negative and would eat into your principle, you would send me packing. Although one theoretically gets 20% return for 7 years, it is not real because it is never realized. The ONLY way to realize this return is to get Johnny down the street so hyped on it in the 5th year, that you can sell him your CD with 5 year to go.

I really think this is analogous to a Maker moving into Tweenerhood. Because your "real" returns from company operations are rolled back into operations, the only way to realize a gain is either through increased book value (which can be considered for accounting purposes) or by selling it to a bigger fool (pun intended), as long as my premise that most great growth companies will eventually fall on hard or not-so-profit-growing times, which they must. If realized gains rely on selling out before the fall, then this is by definition "speculation".

> 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.

You make my point exactly with your Coke example. Coke is probably the best and longest Tweener, yet it is now reverting back to the mean. Maybe GE is still one of the lucky ones, but its day will come.

I hope my analogy make my point better.


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