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.)
Overall, we are certain Berkshire’s performance in the future will fall far short of what it has been
in the past. Nonetheless, Charlie and I remain hopeful that we can deliver results that are modestly above
average. That’s what we’re being paid for.
Acquisitions
As regular readers know, our acquisitions have often come about in strange ways. None, however,
had a more unusual genesis than our purchase last year of Clayton Homes.
The unlikely source was a group of finance students from the University of Tennessee, and their
teacher, Dr. Al Auxier. For the past five years, Al has brought his class to Omaha, where the group tours
Nebraska Furniture Mart and Borsheim’s, eats at Gorat’s and then comes to Kiewit Plaza for a session with
me. Usually about 40 students participate.
After two hours of give-and-take, the group traditionally presents me with a thank-you gift. (The
doors stay locked until they do.) In past years it’s been items such as a football signed by Phil Fulmer and
a basketball from Tennessee’s famous women’s team.
This past February, the group opted for a book – which, luckily for me, was the recently-published
autobiography of Jim Clayton, founder of Clayton Homes. I already knew the company to be the class act
of the manufactured housing industry, knowledge I acquired after earlier making the mistake of buying
some distressed junk debt of Oakwood Homes, one of the industry’s largest companies. At the time of that
purchase, I did not understand how atrocious consumer-financing practices had become throughout most of
the manufactured housing industry. But I learned: Oakwood rather promptly went bankrupt.
Manufactured housing, it should be emphasized, can deliver very good value to home purchasers.
Indeed, for decades, the industry has accounted for more than 15% of the homes built in the U.S. During
those years, moreover, both the quality and variety of manufactured houses consistently improved.
Progress in design and construction was not matched, however, by progress in distribution and
financing. Instead, as the years went by, the industry’s business model increasingly centered on the ability
of both the retailer and manufacturer to unload terrible loans on naive lenders. When “securitization” then
became popular in the 1990s, further distancing the supplier of funds from the lending transaction, the
industry’s conduct went from bad to worse. Much of its volume a few years back came from buyers who
shouldn’t have bought, financed by lenders who shouldn’t have lent. The consequence has been huge
numbers of repossessions and pitifully low recoveries on the units repossessed.
Oakwood participated fully in the insanity. But Clayton, though it could not isolate itself from
industry practices, behaved considerably better than its major competitors.
Upon receiving Jim Clayton’s book, I told the students how much I admired his record and they
took that message back to Knoxville, home of both the University of Tennessee and Clayton Homes. Al
then suggested that I call Kevin Clayton, Jim’s son and the CEO, to express my views directly. As I talked
with Kevin, it became clear that he was both able and a straight-shooter.
Soon thereafter, I made an offer for the business based solely on Jim’s book, my evaluation of
Kevin, the public financials of Clayton and what I had learned from the Oakwood experience. Clayton’s
board was receptive, since it understood that the large-scale financing Clayton would need in the future
might be hard to get. Lenders had fled the industry and securitizations, when possible at all, carried far

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 more expensive and restrictive terms than was previously the case. This tightening was particularly serious
for Clayton, whose earnings significantly depended on securitizations.
Today, the manufactured housing industry remains awash in problems. Delinquencies continue
high, repossessed units still abound and the number of retailers has been halved. A different business
model is required, one that eliminates the ability of the retailer and salesman to pocket substantial money
up front by making sales financed by loans that are destined to default. Such transactions cause hardship to
both buyer and lender and lead to a flood of repossessions that then undercut the sale of new units. Under a
proper model – one requiring significant down payments and shorter-term loans – the industry will likely
remain much smaller than it was in the 90s. But it will deliver to home buyers an asset in which they will
have equity, rather than disappointment, upon resale.
In the “full circle” department, Clayton has agreed to buy the assets of Oakwood. When the
transaction closes, Clayton’s manufacturing capacity, geographical reach and sales outlets will be
substantially increased. As a byproduct, the debt of Oakwood that we own, which we bought at a deep
discount, will probably return a small profit to us.
And the students? In October, we had a surprise “graduation” ceremony in Knoxville for the 40
who sparked my interest in Clayton. I donned a mortarboard and presented each student with both a PhD
(for phenomenal, hard-working dealmaker) from Berkshire and a B share. Al got an A share. If you meet
some of the new Tennessee shareholders at our annual meeting, give them your thanks. And ask them if
they’ve read any good books lately.
************
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).
Taxes
On May 20, 2003, The Washington Post ran an op-ed piece by me that was critical of the Bush tax
proposals. Thirteen days later, Pamela Olson, Assistant Secretary for Tax Policy at the U.S. Treasury,
delivered a speech about the new tax legislation saying, “That means a certain midwestern oracle, who, it
must be noted, has played the tax code like a fiddle, is still safe retaining all his earnings.” I think she was
talking about me.
Alas, my “fiddle playing” will not get me to Carnegie Hall – or even to a high school recital.
Berkshire, on your behalf and mine, will send the Treasury $3.3 billion for tax on its 2003 income, a sum
equaling 2½% of the total income tax paid by all U.S. corporations in fiscal 2003. (In contrast, Berkshire’s
market valuation is about 1% of the value of all American corporations.) Our payment will almost
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