Ground Floor: It's that time of year again; the time when Warren Buffett sends his annual letter to Berkshire Hathaway's shareholders and, as usual, it's an enjoyable read, writes Sheila O'Flanagan.

This year, Buffett takes a pop at some of his favourite targets, including self-promoting fund managers who he refers to as the "pied pipers of performance", complaining they all promise above-average returns on the basis of ever higher charges.

In 2006, he says, promises and fees hit new highs. Buffett is scathing about the fact that 2 per cent of an investor's principal can be paid to the fund manager, even if he or she accomplishes nothing (or, even worse, loses you money!) while at the same time taking 20 per cent of your profit if even average returns are made.

He is most scathing of all about the fact that the fund manager can earn fees on returns, even if those returns are simply based on the fact that the overall market has gone up and your stocks with it, with no additional effort on the manager's behalf.

According to Buffett, it is a "grotesque arrangement" and it evokes some of his homespun wisdom - "when someone with experience proposes a deal to someone with money, too often the fellow with money ends up with the experience, and the fellow with the experience ends up with the money".

It's true that the older you get, the less time you have for people spinning you stories about complicated investment strategies to beat the market and deliver superior returns, especially when they're talking about skimming a chunk of your capital in the process.

Managing money is all about balancing risk and reward. The problem is that most of us want the rewards without the risk and are keen to believe someone who tells us it's possible - forgetting that to buy into this possibility will divert a chunk of the reward elsewhere.

Over the years, Buffett made money by buying into companies where he liked the stock and that he thought was good value. Back in the early part of the decade, he confessed to be bemused by the dotcom boom and told investors that his fund's underperformance was due to the fact that he didn't understand them. A couple of years later, he was congratulating himself on not having understood them. Or, perhaps, on having understood them only too well!

Buffett is 76 and, despite claiming to be in excellent health, he refers frequently to his inevitable demise and to his potential successor. His problem, and that of Berkshire Hathaway, is that many of his colleagues of a similar mindset are also in their 70s. He goes out of his way to recall another friend - Walter Schloss - who is now in his 90s and who managed a fund that didn't charge investors unless they made money. When Walter was asked in 1989 by Outstanding Investors' Digest how he summarised his approach to investing, he replied that he tried to "buy stocks cheap". Which is what successful investing is all about, but doesn't sound as exciting as a glossy report full of global macro strategies.

Anyone succeeding Buffett, if they're in their 40s or 50s, will probably be a product of Harvard and Wall Street and will have a different approach to investing - one in which the letter to investors will concentrate less on folksy chat and more on dynamic returns.

Age and succession has always been a feature of Buffett's letters. Back in 1977, he was worried about it too - although in this case his concerns were for the chairman of the Illinois National Bank, which was then owned by the company. Gene Abegg founded it in 1931 with $250,000 and was still at the helm, aged 80, 46 years later. Abegg was succeeded that year by Peter Jeffrey. The following year, the bank was still doing well and still producing strong returns.

The Bank Holding Company Act 1969, however, meant that, by 1979, Berkshire Hathaway had to spin it off, despite its continued profitability.

Buffett told shareholders that he would be choosy about whom he sold it to because the bank and management had treated them well over the years and he wanted to be sure that they too would be treated well. Therefore, the sale would not be based solely on price.

If you told an investor today that you were contemplating a sale where the best possible price wasn't the only criteria for the company you were selling, you'd be lynched! Looking after the other person isn't generally an accepted view of how the markets work anymore - when we're looking at rewards, it's ourselves we want to reward most.

In 1982, Buffett set out his investment approach for the benefit of people who might be able to help in the acquisition process. He preferred large purchases, consistent earning power, good return on equity with little debt, management already in place, simple business (he confessed to not understanding technology!), and an offer price on the table. He wouldn't, he said, engage in an unfriendly transaction and would come back with an answer within five minutes.

It's likely that the speed of his decisions might have changed over the years, but his basic philosophies haven't. He is still a shrewd investor. The ageing process hasn't dulled his intellect, but he is anxious not to stay at the helm too long, fearing that he could one day be "delusionally thinking that I am reaching new heights of managerial brilliance".

I suppose the difference between him and many fund managers is that they usually market themselves as being managerially brilliant already.

www.sheilaoflanagan.net