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updated 3/7/2004 5:43:28 PM ET 2004-03-07T22:43:28

Berkshire Hathaway, the insurance and holding company run by legendary investor Warren Buffett, amassed a record cash pile of $36 billion in 2003 as the world's second-richest man once again shied away from soaring stock markets.

The mountain of cash or cash equivalents revealed in Berkshire's annual report, up from $13 billion in 2002, is the clearest sign yet of Mr. Buffett's continued skepticism about the valuations of companies and other investment opportunities.

It comes despite the benefits of a recovering US economy and better management of Berkshire's own insurance businesses, which combined to increase its pre-tax profits by 88 per cent to $12 billion.

"It [2003] was a terrific year for our insurance business, but the big boost that gave to earnings was largely offset by the pathetically low interest rates we earned on our large holdings of cash equivalents," said Mr. Buffett in his annual letter to shareholders.

Berkshire's investment strategy also highlights the difficulty of finding meaningful returns at a company that has grown so large -- ranging from Coca-Cola and American Express to carpets and poultry equipment. Berkshire shares underperformed against the S&P 500 index of big US companies by 7.7 percent in 2003, but have outperformed by an average of 11.8 percent over the last 38 years.

"Our capital is underutilized now ... It's a painful condition to be in -- but not as painful as doing something stupid," added Mr. Buffett. "We have purchased a number of businesses in recent years, though not enough to fully employ the gusher of cash that has come our way."

The chairman's caution has been largely justified in the past, particularly during the technology bubble in 1999, which was the last time that Berkshire shares underperformed against the S&P 500 and the year after its previous cash peak.

Mr. Buffett also highlighted a number of risks to the US economy that add to last year's warnings on derivatives, mutual funds and corporate governance.

In particular, he singled out the weak dollar as a cause for concern and revealed that Berkshire Hathaway had $12 billion invested in foreign currencies to balance its exposure to the falling greenback.

"Prevailing exchange rates will not lead to a material letup in our trade deficit. So whether foreign investors like it or not they will continue to be flooded with dollars," said Mr. Buffett. "The consequences of this are anybody's guess. They could, however, be troublesome - and reach, in fact, well beyond currency markets."

The so-called "Sage of Omaha", whose annual letter to shareholders is keenly anticipated as a commentary on corporate America, was also dismissive of attempts to reform corporate governance -- singling out Jeff Immelt of General Electric as a rare exception.

"In judging whether corporate America is serious about reforming itself, CEO pay remains the acid test," he said. "To date, the results aren't encouraging."

Yet Mr. Buffett also conceded Berkshire's own corporate governance challenges were a significant issue for shareholders as they increasingly worry about who will succeed the 73-year-old chairman.

Copyright The Financial Times Ltd. All rights reserved.

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