Summary of 2003 Berkshire Hathaway (BRK) Chairman Letter

What were the details of the letter:

· Equity holdings, as a percentage of net worth, have fallen to an average of 50%, from an average of 114% in the 1980s.

· Valuations and Berkshire’s size have made it difficult to find attractive stocks.

· Given similar valuations, owning businesses is preferable to owning stocks for Berkshire.

· Capital allocation decision will not be guided by past history or short-term profits.

· As long as the standards for acquiring businesses are met [(1) have favorable and enduring economic characteristics; (2) are run by talented and honest managers and (3) are available at a sensible price], Berkshire will continue to buy businesses under any market or economic conditions.

· Acquired Clayton Homes and McLane from sellers with strong reputation (Clayton, Wal-Mart) and did limited due diligence.

· Buffett was critical of President Bush’s tax proposals that favour large corporation and wealthy individuals.

· Buffett also was critical of mutual fund managers and directors who acted against the interest of investors, chief executives who were paid excessively, and corporate boards of directors who were deemed as “independent” but acted otherwise.

· Risk exposures in derivative are difficult to quantify. Gen Re had been trying to exit its derivative positions.

· “Every tub on its own bottom” philosophy—any subsidiary should pay an appropriate rate of interest and should not be subsidized by its parent.

· Buffett mentioned about the mistake of not selling several of larger equity holdings during The Great Bubble.

· Buffett enlarged Berkshire’s currency trading position based on his expressed concerns about U.S. trade deficits.

Practical application:

· Patience.

· Find people you admire.

· Adapt to changing environment but maintain the same framework that is logical and time tested.

Quotes from the letter:

· “A company’s history, for example, may commit it to an industry that now offers limited opportunity. A more common problem is a shareholder constituency that pressures its manager to dance to Wall Street’s tune. Many CEOs resist, but others give in and adopt operating and capital- allocation policies far different from those they would choose if left to themselves.”

· “Under any market or economic conditions, we will be happy to buy businesses that meet our standards. And, for those that do, the bigger the better. Our capital is underutilized now, but that will happen periodically. It’s a painful condition to be in – but not as painful as doing something stupid. (I speak from experience.)”

· “In 1985, Berkshire paid $132 million in federal income taxes, and all corporations paid $61 billion. The comparable amounts in 1995 were $286 million and $157 billion respectively. And, as mentioned, we will pay about $3.3 billion for 2003, a year when all corporations paid $132 billion.”

· “Then, when a management company was sold – invariably act a huge price relative to tangible assets – the directors experienced a “counter-revelation” and immediately signed on with the new manager and accepted its fee schedule. In effect, the directors decided that whoever would pay the most for the old management company was the party that should manage the shareholders’ money in the future.”

· “No matter how financially sophisticated you are, you can’t possibly learn from reading the disclosure documents of a derivatives-intensive company what risks lurk in its positions. Indeed, the more you know about derivatives, the less you will feel you can learn from the disclosures normally proffered you. In Darwin’s words, ‘Ignorance more frequently begets confidence than does knowledge.’”

· “You may wonder why we borrow money while sitting on a mountain of cash. It’s because of our “every tub on its own bottom” philosophy. We believe that any subsidiary lending money should pay an appropriate rate for the funds needed to carry its receivables and should not be subsidized by its parent.”

3+ questions to the group & group discussion:

· Temperament: what exactly is needed to be successful in investment operation?

· Corporate/board misbehavior: should we try to identify them?

· Mutual funds: will you ever consider investing in them or suggest to friend/family?