Warren Buffett's 2003 Shareholder Letter: The True Logic of Intrinsic Value and Capital Allocation

In his 2003 shareholder letter, Warren Buffett explicitly stated that the core metric for measuring company performance is intrinsic value per share, not book value. He wrote: “It’s per-share intrinsic value that counts, however, not book value.” This view corrects the common investor misconception of equating accounting figures with real wealth. Buffett emphasized that although book value calculations have flaws, at Berkshire, it can still serve as a slightly understated indicator of long-term intrinsic value growth.

As the company's scale expanded and its asset structure changed, simply comparing annual performance against the S&P 500 index became less relevant. Buffett noted that because equity holdings dropped from 114% of net worth in the 1980s to an average of 50% between 2000 and 2003, stock market volatility had significantly reduced its impact on net worth. Therefore, he focused more on whether the company could achieve intrinsic value growth exceeding that of index funds in the future; otherwise, management would be unnecessary.

Regarding capital allocation, Buffett revealed the constraints imposed by scale. He pointed out that when valuations are similar, they strongly prefer owning businesses over stocks. However, in recent years, it has been difficult to find significantly undervalued stocks, and the surge in available capital has exacerbated this difficulty. He warned that investment managers often profit more from accumulating assets than from managing them. This explains why Berkshire shifted toward acquiring companies with durable economic characteristics, managed by honest and capable leaders, at reasonable prices.

For readers today, consider an investor facing a company with a massive market cap but slowing growth. One should not look solely at historical stock price appreciation or book profit growth rates. Buffett's logic suggests we must examine whether the company has lost the flexibility to allocate capital due to its excessive size, and whether its core business can still generate intrinsic value above market averages. This perspective helps identify companies plagued by the "curse of scale."