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WARREN BUFFETT was preparing to address the media last week on California's budget crisis when he had a crisis of his own. A precious document had been misplaced. Finding the confidential file nearby, he quickly plopped his coat over it before anyone caught a glimpse. State secrets? Not exactly. It was the draft of Mr. Buffett's annual letter to Berkshire Hathaway Inc. shareholders. A must-read in the financial world, Mr. Buffett's letter is coveted by investors. It sometimes moves markets. It's often controversial, and entertaining. The 73-year-old investor will reveal it tomorrow around 9 a.m. EST on Berkshire's Web site. Says Mr. Buffett, "I protect it like it's the secret formula to Coke." The letter -- 12,500 words over 21 pages -- will recount his company's performance and Mr. Buffett's investment moves in the past year. It also will reveal Mr. Buffett's thoughts on the economy, markets and the state of American capitalism. Other chief executive officers, politicians and investors will scrutinize the letter and its predictions because Mr. Buffett's messages have at times been barometers of future corporate issues. Mr. Buffett attacked CEO greed as early as 1992, for instance, and abuse of stock options during their heyday in 1998. Most corporate annual reports are slick -- and boring. Mr. Buffett's are folksy, sprinkled with bad jokes and quotes from luminaries, ranging from Mae West to Yogi Berra. "His reports have become a kind of 'Prairie Home Companion' in which Wall Street is Lake Wobegon," says Andrew Kilpatrick, a longtime Buffettologist. "Buffett sets out to tell what awful truths are there." Some critics aren't amused. Shelley Taylor, a management consultant who issues analyses of annual reports, rates Mr. Buffett's document as one of the worst by companies in the Fortune 50 (the top tier of the Fortune 500). The problems, she says: a failure to strategically review operations and provide concrete objectives for his shareholders. "His letter is far too personal and comes off as a one- man show," Ms. Taylor asserts. "Portfolio managers are getting younger and won't be enamored of his style that can be a bit insulting." Mr. Buffett shrugs off the criticism. He says his letters show how he treats shareholders like long-term partners rather than investors who zig in and out with market gyrations. But Mr. Buffett also uses the letter as a bully pulpit of sorts, to ignite debate on hot business issues. This year's opus is likely to attack expanding tax breaks to corporations and the rich, including the recent dividend-tax cut, which he believes boosts the tax burden of the working class. Shareholders are gearing up. Jack Benvent, a 41-year-old Berkshire investor in Mountain Lakes, N.J., told his wife to cancel their antiquing plans for this weekend. "She can't understand why I want to plant myself in front of the computer to read a letter from a guy in Omaha," he says. He compares the letter to baseball's "opening day," adding that he will exchange messages all weekend with dozens of other shareholders in various Berkshire-related chat rooms. Even Mr. Buffett's management team anxiously awaits the boss's letter, which will praise some Berkshire firms and criticize others. "It's our report card from Warren," says Joseph Brandon, CEO of General Re Corp., a big insurance subsidiary, who postponed his Saturday plans until the afternoon. "It's the only company in the world where your performance review is a public document." This year's report began like all the others: handwritten on a yellow legal pad. His first words are: "Dear Doris and Bertie" -- his sisters. He pretends he is writing a letter to them to keep a homespun tone, to avoid jargon and speak candidly. "My sisters aren't financial experts, but they're intelligent and interested. I don't try to impress them, but I don't talk down to them either," he says. Writing at home or on his company's Gulfstream IV jet, he scrawls notes and then passes them to an assistant to be typed and triple- spaced, "so I have room to make changes," he says. This year, he went through dozens of triple-spaced drafts. He eventually crosses out his sisters' names, substitutes "To the Shareholders of Berkshire Hathaway Inc.," and prints it out. This version is sent to Carol Loomis, a longtime friend of Mr. Buffett's and editor-at-large at Fortune magazine, who has edited his letters for 25 years -- and has three bracelets made up of enameled copies of annual-report covers to show for it. But the billionaire investor does nearly everything himself. He's his own fact-checker. Last week on a plane ride from Manhattan to Omaha, he confirmed statistics on the percentage of new homes in the U.S. that are mobile homes (more than 15%), which he included in a paragraph about Berkshire's acquisition last year of mobile-home giant Clayton Homes. (A 1,600-square-foot mobile home will be at Berkshire's annual meeting, crammed with products from other Berkshire companies, such as Shaw carpets and World Book encyclopedias.) Mr. Buffett also is graphic designer, if you can call it that. His letter has no photographs, changes in font or type size or glitzy graphics. He makes sure financial tables don't break between pages. And he cuts "widows," a single word on a line that leaves unused white space. He looks for memorable phrases. In one annual letter, he complained that any director's questioning of lavish options awards to CEOs was tantamount to "belching at the dinner table." He moaned that misleading tax treatments have resulted in an "Alice in Wonderland outcome." Last year, before New York Attorney General Eliot Spitzer launched a probe of the mutual-fund industry, Mr. Buffett wrote: "A monkey will type out a Shakespeare play before an 'independent' mutual-fund director will suggest that his fund look at other managers." He called derivatives "weapons of mass financial destruction," prompting a rebuttal from Federal Reserve Chairman Alan Greenspan. A professed technophobe, Mr. Buffett tracks the number of "hits" his letter gets on Berkshire's Web site. He consults a file that documents his company's Internet traffic. On an average day, the Berkshire site receives about 3,000 visitors. On the days following the release of his letter, the number of hits skyrockets to about 20,000. No matter what Mr. Buffett writes, some copycat investors are sure to follow suit. They reason that Mr. Buffett still makes every decision to buy and sell securities in Berkshire's $35 billion stock portfolio. Says Mr. Kilpatrick, the longtime Buffett watcher, "I'll immediately buy 10 shares of whatever Buffett has bought." |