Part 27 of the series I've not been able to finish off offers a look at the words of wisdom of Warren Edward Buffett from the year 2003, as witnessed via his annual Letter to Berkshire Hathaway Shareholders. Let us see what nuggets we can uncover...

Another pretty good year in 2003:

Our gain in net worth during 2003 was $13.6 billion, which increased the per-share book value of both our Class A and Class B stock by 21%. Over the last 39 years (that is, since present management took over) per-share book value has grown from $19 to $50,498, a rate of 22.2% compounded annually.

Buffett explains the quandary of having too much money:

When valuations are similar, we strongly prefer owning businesses to owning stocks. During most of our years of operation, however, stocks were much the cheaper choice. We therefore sharply tilted our asset allocation in those years toward equities, as illustrated by the percentages cited earlier. In recent years, however, we've found it hard to find significantly undervalued stocks, a difficulty greatly accentuated by the mushrooming of the funds we must deploy. Today, the number of stocks that can be purchased in large enough quantities to move the performance needle at Berkshire is a small fraction of the number that existed a decade ago. (Investment managers often profit far more from piling up assets than from handling those assets well. So when one tells you that increased funds won't hurt his investment performance, step back: His nose is about to grow.)

And...

We will continue the capital allocation practices we have used in the past. If stocks become significantly cheaper than entire businesses, we will buy them aggressively. If selected bonds become attractive, as they did in 2002, we will again load up on these securities. 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.)

This next passage is interesting to me for two reasons: one, it involves Buffett doing a deal with Wal-Mart and speaking favorably of the corporation that incites both love and hatred depending on your views, and, two, it includes Buffett giving a rare thumbs-up to an investment banker (in fact, the Wall Street Journal just recently made note of this very paragraph while profiling the banker in question, Byron Trott, who helped engineer Buffett's latest big buy):

In early spring, Byron Trott, a Managing Director of Goldman Sachs, told me that Wal-Mart wished to sell its McLane subsidiary. McLane distributes groceries and nonfood items to convenience stores, drug stores, wholesale clubs, mass merchandisers, quick service restaurants, theaters and others. It's a good business, but one not in the mainstream of Wal-Mart's future. It's made to order, however, for us.

McLane has sales of about $23 billion, but operates on paper-thin margins - about 1% pre-tax - and will swell Berkshire's sales figures far more than our income. In the past, some retailers had shunned McLane because it was owned by their major competitor. Grady Rosier, McLane's superb CEO, has already landed some of these accounts - he was in full stride the day the deal closed - and more will come.

For several years, I have given my vote to Wal-Mart in the balloting for Fortune Magazine's "Most Admired" list. Our McLane transaction reinforced my opinion. To make the McLane deal, I had a single meeting of about two hours with Tom Schoewe, Wal-Mart's CFO, and we then shook hands. (He did, however, first call Bentonville). Twenty-nine days later Wal-Mart had its money. We did no "due diligence." We knew everything would be exactly as Wal-Mart said it would be - and it was.

I should add that Byron has now been instrumental in three Berkshire acquisitions. He understands Berkshire far better than any investment banker with whom we have talked and - it hurts me to say this - earns his fee. I'm looking forward to deal number four (as, I am sure, is he).

Despite his personal wealth, and Berkshire's hefty tax bill, Buffett shows not much love for the policies of the George W. Bush administration:

...tax breaks for corporations (and their investors, particularly large ones) were a major part of the Administration's 2002 and 2003 initiatives. If class warfare is being waged in America, my class is clearly winning. Today, many large corporations - run by CEOs whose fiddle-playing talents make your Chairman look like he is all thumbs - pay nothing close to the stated federal tax rate of 35%.

After a rant about the sleazy things going on at many mutual funds, Buffett offers this disclaimer that the average investor might heed:

A great many funds have been run well and conscientiously despite the opportunities for malfeasance that exist. The shareholders of these funds have benefited, and their managers have earned their pay. Indeed, if I were a director of certain funds, including some that charge above-average fees, I would enthusiastically make the two declarations I have suggested. Additionally, those index funds that are very low-cost (such as Vanguard's) are investor-friendly by definition and are the best selection for most of those who wish to own equities.

On his successor at Berkshire:

At our directors' meetings we cover the usual run of housekeeping matters. But the real discussion - both with me in the room and absent - centers on the strengths and weaknesses of the four internal candidates to replace me.

Our board knows that the ultimate scorecard on its performance will be determined by the record of my successor. He or she will need to maintain Berkshire's culture, allocate capital and keep a group of America's best managers happy in their jobs. This isn't the toughest task in the world - the train is already moving at a good clip down the track - and I'm totally comfortable about it being done well by any of the four candidates we have identified. I have more than 99% of my net worth in Berkshire and will be happy to have my wife or foundation (depending on the order in which she and I die) continue this concentration.

An unusual aside in the 2003 letter has Buffett making some financial book recommendations. If Buffett likes them, maybe you should be reading them, too:

A 2003 book that investors can learn much from is Bull! by Maggie Mahar. Two other books I'd recommend are The Smartest Guys in the Room by Bethany McLean and Peter Elkind, and In an Uncertain World by Bob Rubin. All three are well-reported and well-written. Additionally, Jason Zweig last year did a first-class job in revising The Intelligent Investor, my favorite book on investing.

Closing out the 2003 letter, a good line:

Last year, I asked you to vote as to whether you wished our annual meeting to be held on Saturday
or Monday. I was hoping for Monday. Saturday won by 2 to 1. It will be a while before shareholder democracy resurfaces at Berkshire.