This is the continuation of our analysis of Warren Buffett's annual letter to shareholders. For Part 1, click here.

The Bubble Burst

Buffett appears to have at least a small sense of pride in his year-ago prediction that the market could not sustain its lofty valuations. He says all the signs of a bubble were present and it was bound to burst, creating significant pain.

"[A] pin lies in wait for every bubble," he wrote. "And when the two eventually meet, a new wave of investors learns some very old lessons. First, many in Wall Street -- a community where quality control is not prized -- will sell investors anything they will buy. Second, speculation is most dangerous when it looks easiest."

It was simply way too easy. "Far more irrational still were the huge valuations that market participants were then putting on businesses almost certain to end up being of modest or no value," Buffett wrote. "Yet, investors, mesmerized by soaring stock prices and ignoring all else piled into these enterprises. It's as if some virus, racing wildly among investment professionals as well as amateurs, induced hallucinations in which the values of stocks in certain sectors became decoupled from the values of the businesses that underlay them."

What's next? Buffett isn't saying. Instead, he gives his grandchildren's update of Aesop: "A girl in a convertible is worth five in the phone book."

You can bet Buffett isn't cruising the "White Pages" in this market.

Buffett Briefs

Buffett's letter also always contains some gems. Here are a few from this year's missives:

On the aging Buffett and Berkshire Vice-Chairman Charlie Munger: