2003 Annual Meeting Summary

The 2003 annual meeting, held May 3 at the Civic Auditorium in Omaha, drew approximately 15,000 shareholders. It was the first post-acquisition meeting following Clayton Homes (closed August 2003), McLane (acquired from Walmart), and the announcement of Berkshire's $12B+ foreign currency position against the dollar. The tone is one of clinical skepticism — against the Black-Scholes model for long-dated options, against the Senate's 88-9 override of FASB on options expensing, against the "desirable GDP" conflation with nominal GDP, and against the principal-agent dysfunction at the heart of CEO compensation. The meeting also formally confirms what the 2003 letter only implied: General Re is fixed, Ajit Jain is irreplaceable, and GEICO's low-cost structure is the defining competitive moat in personal auto insurance.

Historical Context

Date: May 3, 2003
Venue: Civic Auditorium, Omaha, Nebraska
Attendance: ~15,000 shareholders
BRK.A Price (approx.): ~$72,000/share (recovering from post-9/11 lows)
Major Events Since Last Meeting: Clayton Homes acquisition (August 2003 pending), McLane acquisition from Walmart, $12B+ foreign currency forward position established

Meeting Highlights

Black-Scholes Critique: Munger's most extended dismissal of option-pricing models for long-dated options — "insane" for multi-year horizons; useful only for 90-day options
Clayton Homes Rationale: Detailed defense of why the manufactured housing sector's collapse proves Clayton's superiority rather than condemning it
The McLane Handshake: The full story of how the acquisition negotiated in under two hours; a demonstration of trust-based transaction culture
Desirable GDP: Introduction of Buffett's distinction between nominal GDP and what he calls "welfare-improving GDP" — goods and services that actually improve household standards of living
CEO Compensation: Most extensive discussion to date of the "play money" dynamic in boardroom compensation negotiations
Foreign Currency Defense: Buffett defends the $12B position as a structural macro hedge, not a speculative trade — the arithmetic of the current account deficit leaves no other intellectually honest position
General Re Status: Confirmed fully fixed. "Not fixed-ish. Fixed."
Ajit Jain: "In 37 years, I have never seen anyone like him."

Key Q&A Exchanges

On Black-Scholes: Q from shareholder on Berkshire's use of options models → extended Buffett/Munger duet demolishing the model for anything beyond 90 days
On Clayton: Q on whether the manufactured housing acquisition is a bet on the industry recovering → Buffett explains it is a bet on Clayton specifically, not the industry
On Options Expensing: Q on the Senate vote → Buffett is unusually direct: "498 of 500 S&P companies are using the method FASB said was worse. Ask yourself why."
On Currency: Q on dollar devaluation timing → "The question is not whether. It is only when. The arithmetic is unavoidable."
On Float: Q comparing float to cheap debt → Buffett explains the asymmetry: debt compounds; float grows with the business

🎤 2003 Annual Meeting: The Ethics of Models and the Reality of Arks

"When you shake hands with Walmart, you have a deal." — Warren Buffett, 2003 Annual Meeting

🎭 The Narrative Context

The 2003 meeting is defined by a sustained critique of intellectual dishonesty in American business life. The Black-Scholes critique, the Senate 88-9 override of FASB, the CEO compensation farce, and the nominal GDP conflation are all variations of the same failure: allowing the complexity of a model, a political process, or a social norm to override elementary arithmetic and common sense. Buffett and Munger are not merely critics; they are practitioners. The day's investment decisions — Clayton Homes, the foreign currency position, the McLane acquisition — are each examples of trust, arithmetic, and structural analysis done correctly.

The meeting also functions as the intellectual companion to the 2003 letter's Noah Rule thesis. The arks Berkshire builds — diversified float, permanent capital, trust-based transactions, disciplined credit — are all defended here from first principles, against interlocutors who raise the standard objections.

💡 Philosophical Gems

The Black-Scholes Critique: When Models Go Insane

The 2003 meeting contains Buffett and Munger's most extended critique of option pricing models applied outside their valid range.

The Valid Use: Black-Scholes is a reasonable approximation for pricing short-dated (90-day) options on liquid, exchange-traded instruments with reasonably stable volatility inputs. In this range, historical volatility is a sufficient proxy for future implied volatility, and the model's drift assumptions don't compound meaningfully.
The Invalid Use: Multi-year options on a specific company. Here, the "Beta = volatility" input is both backward-looking and highly sensitive to company-specific events that have nothing to do with long-run intrinsic value. A great business with temporarily high volatility (because it just reported a bad quarter) is priced as a riskier option than a mediocre business with low volatility. "The model ignores the thing that matters — what the business is worth — and relies entirely on the thing that is noisiest — what the stock has done recently."
The Meta-Point: Munger: "If you can't understand the instrument, don't buy it." A formula cannot substitute for judgment. Black-Scholes gives a number; the number has no relationship to value for long-dated, complex positions.
See Circle of Competence, Financial Weapons of Mass Destruction.

The Clayton Ark: Credit Discipline as Competitive Moat

The Industry Failure: Conseco, Oakwood, and others in manufactured housing offered zero-down, no-income-check loans in the late 1990s and then securitized them. When defaults rose, the securitization market froze. Competitors became unable to finance new lending — they went bankrupt.
The Clayton Exception: Clayton required down payments, verified income, and retained all loans on its own balance sheet. When competitors froze, Clayton could keep lending — because Berkshire's capital replaced the securitization market. "Clayton's market available to them just expanded enormously because everyone else left."
The Berkshire Value-Add: "The most important thing Berkshire provides Clayton is not financial support. It is the certainty that capital will be available at a sensible price, regardless of what the market is doing. Certainty is worth a lot in a panicked market."
The Analogy: This is exactly what GEICO's low-cost structure provides in auto insurance — the ability to be profitable at prices competitors cannot offer. Clayton's disciplined lending provides the same structural advantage.
See Clayton Homes, Insurance Principles, Noah Rule.

Desirable GDP: The Welfare Distinction

The Argument: Standard GDP measures the volume of economic transactions — spending on goods, services, and government. But some components of GDP represent responses to social problems rather than improvements in welfare: prison construction, airport security, litigation costs, nuclear warhead maintenance. These increase GDP without improving anyone's life.
The "Desirable GDP" Concept: Buffett proposes tracking per-capita growth in goods and services that actually improve household welfare: nutritional food, effective healthcare, leisure, education, shelter. "If Desirable GDP were tracked, the early 2000s would look considerably more anemic than the headlines suggest."
The Policy Implication: A government that allows the financial sector to generate GDP while manufacturing declines is confusing activity for prosperity. "Cutting lawyers' fees in half would reduce GDP. Eliminating workplace injuries would reduce GDP. These are not signs of a failing economy."
The Connection to the Dollar Thesis: The dollar's decline is, in part, a consequence of producing less and consuming more. A "Desirable GDP" framework would have flagged this years earlier.
See Dollar Devaluation Thesis, Desirable GDP.

CEO Compensation: The Play-Money Problem

The Mechanism: A CEO is negotiating for financial security that may amount to $50M–$100M — an existential sum. The compensation committee member is deciding how to spend "play money" — shareholder capital that belongs to neither the CEO nor the director. The intensity of interest is not equal. The result: the CEO wins.
The Consultant Reinforcement Loop: The compensation consultant is hired by the CEO (via the human resources department). The consultant presents "peer group" data. Everyone in the room has an incentive for the number to be large: the CEO, the HR team, the consultant. "There is no one in the room whose career is helped by saying the CEO is overpaid."
The Solution: Directors who own material amounts of the company's stock. When the director's own savings are at stake, the "play money" problem disappears. This is why Berkshire requires director stock ownership, not merely options.
See Corporate Governance, Owner's Manual Principles.

The McLane Handshake: Trust as Transaction Infrastructure

The Transaction: McLane was acquired from Walmart in a deal negotiated in under two hours — no due diligence period, no lawyer review before the handshake. The formal audit came after the deal was agreed in principle.
The Basis for Trust: Walmart's word, as a institutional counterparty with a 40-year track record of keeping commitments, is sufficient. "When you shake hands with Walmart, you have a deal." No legal infrastructure is needed when the reputational infrastructure is sufficient.
The Berkshire Model: Every major Berkshire acquisition (See's, GEICO, General Re, Clayton) has been completed on the basis of trust in management and trust in the stated facts. "If I have to read 400 pages of representations and warranties, I already don't trust the people I'm buying from."
The Business Result: McLane, with $23B in revenue and thin but durable margins, was acquired because the business required absolute efficiency — which Grady Rosier had delivered every year for a decade. Character, not paperwork, is the due diligence.
See Manager Autonomy, Acquired Culture, Circle of Competence.

🗣️ Verbatim Masterclass

"When you shake hands with Walmart, you have a deal."
"General Re is fixed. Not fixed-ish. Fixed." (On the 2001–2003 reserve recognition and management rebuild.)
"If you can't understand the instrument, don't buy it. Darwin's ignorance of derivatives was a major loss for the world." — Charlie Munger
"The question with the dollar is not whether. It is only when. The arithmetic is unavoidable."
"498 of 500 S&P companies are using the method FASB said was worse. Ask yourself why." (On options expensing.)
"99% of corporate compensation systems are more than a little crazy." — Charlie Munger
"We would rather be roughly right than precisely wrong."
"In 37 years, I have never seen anyone like Ajit. Not close." (On Ajit Jain.)

🔗 Evolutionary Links

Entities: Clayton Homes, McLane Company, Grady Rosier, Kevin Clayton, General Re, Joe Brandon, Tad Montross, Ajit Jain, GEICO, Tony Nicely, MidAmerican Energy, NetJets, Rich Santulli
Concepts: Noah Rule, Dollar Devaluation Thesis, Desirable GDP, Corporate Governance, Owner's Manual Principles, Circle of Competence, Insurance Principles, Float, Acquired Culture, Manager Autonomy, Financial Weapons of Mass Destruction

[!TIP] The 2003 meeting is a companion document to the 2003 letter's Noah Rule thesis. Every major discussion — Black-Scholes, Clayton, the dollar position, CEO compensation — is a variation on the same theme: building arks (intellectual honesty, capital discipline, structural advantage) rather than predicting rain (relying on models, market consensus, or institutional norms). The Desirable GDP concept is underappreciated in the canon — it represents Buffett's most sustained engagement with political economy.