OMAHA, Neb. ( TheStreet) -- Warren Buffett's annual letter to shareholders of Berkshire Hathaway ( BRK.B) -- released on Saturday -- was full of the usual quotable quotes.
Buffett suggested Berkshire shareholders come to the May annual meeting by rail, a cheeky reference to Berkshire Hathaway's huge acquisition of Burlington Northern.

In praising Berkshire Hathaway's national indemnity business head, Ajit Jain, Buffett said, "If Charlie Munger , I and Ajit are ever in a sinking boat -- and you can only save one of us -- swim to Ajit."

Within the first two pages of the annual letter, Buffett offered a link between the work on problem-solving pioneered by Prussian mathematician Jacobi and country music. Jacobi advised to "invert, always invert, and Buffett attested to the advice being applicable beyond running a profitable business: "I can report as well that this inversion approach works on a less lofty level: Sing a country song in reverse, and you will quickly recover your car, house and wife."

More important for investors of Berkshire Hathaway, though, may have been discussion of how the house and car were doing in the last quarter of 2009. Berkshire Hathaway's operating subsidiaries are heavily tied to the performance of the U.S. economy, particularly the housing market as an example. Are Warren and Charlie Munger in a sinking boat?

Far from it, though the U.S. cyclical stocks did continue to be a short-term drag on Berkshire Hathaway's otherwise solid performance.

In the fourth quarter, Berkshire Hathaway sold one million shares of CarMax ( KMX). Berkshire Hathaway's home building subsidiary Clayton Homes has struggled amid the worst market for new homes in 50 years.

Bill Bergman, an analyst at Morningstar, said he was looking for a bigger turnaround in the U.S. cyclical stocks than Berkshire Hathaway delivered in the fourth quarter, though Bergman noted that the cash flow position of Berkshire Hathaway kept moving north, and saw a significant increase, even as the operating subsidiary performance was weighing on the company.

Berkshire Hathaway investors were probably looking for clues about 79-year-old Buffett's succession planning, but Berkshire Hathaway spread its praise far and wide for the executives who run some of its most important subsidiaries.

While Buffett said that national indemnity business chief Ajit Jain should be saved from a sinking boat before either he or 86-year-old Berkshire chief operating officer Charlie Munger, the annual letter provided glowing reports on many of the Berkshire Hathaway business heads, from Tad Montross of General Re to GEICO's Tony Nicely, who Buffett noted tap dances into work like he is in the habit of doing. Mid-American Energy Holdings' management team of David Sokol and Greg Abel was also singled out for praise from Buffett.

Still, those looking for details of Berkshire Hathaway succession planning were sorely disappointed . As much Jacobi-esque inversion as a mathematically-inclined Berkshire Hathaway investor can handle, the problem of who will succeed the Oracle of Omaha still can not be solved.

Buffett said in the annual report he expects houses -- those lost by country singers and, frankly, too many Americans -- to continue to be losers in the short-term, but within a year or so, "the residential housing problems should largely be behind us," as the supply-demand balance reaches equilibrium.

Buffett also alluded to less competition for Clayton once the market does turn back in its favor, noting that a decade ago, the three leading manufacturers were Fleetwood, Champion and Oakwood, which together accounted for 44% of the output of the industry. All have since gone bankrupt, and no amount of Jacobi-like inversion will bring them back.

Buffett analysis of a housing market recovery was certainly more unique than a typical report from the National Association of Realtors or Commerce Department. Buffett wrote in his annual letter that while the U.S. could blow up a lot of houses to drive housing demand, or encourage home construction by encouraging teenagers to cohabitate, the sound choice of waiting for supply and demand to come back into equilibrium should benefit companies like Clayton Homes by the end of 2010.

Buffett also used the letter to reiterate an important theme about the growth of Berkshire Hathaway: if it was a house, it has gone through quite a few renovation and addition projects.

Still, Berkshire Hathaway wouldn't be like one of the U.S. luxury McMansions in the high-value home market that Buffett expects will remain under pressure beyond 2010. Buffett does, however, see the impact of Berkshire Hathaway's size as a trend that will not diminish (no Buffett-like pun intended).

"Our performance advantage has shrunk dramatically as our size has grown, an unpleasant trend that is certain to continue," Buffett wrote in the annual letter. It's not news, really, as Buffett has previously remarked on the narrowing of Berkshire's outperformance of the S&P 500 Index.

Buffett noted again that Berkshire has never had a five-year period between 1965-1969 and 2005-2009 during which Berkshire's book value did not exceed the S&P gains. What's more, Buffett noted that while Berkshire Hathaway has underperformed the S&P in some years -- 2009 was a notable example -- it has consistently done better than the S&P in the eleven years since 1965 when the index was negative.

Buffett noted that this S&P outperformance reflects Berkshire Hathaway's defense over its offense. Buffett also acknowledged that "huge sums forge their own anchor and our future advantage, if any, will be a small fraction of our historical edge."

Where was the edge in 2009? Berkshire Hathaway's per share book value grew 19.8% in 2009, very close to its compounded annual gain of 20.3% per share from 1965 through 2009.

The annual Berkshire Hathaway letter also include the usual humble admission of missteps made by Buffett and Buffett alone.

Buffett noted that 2009 was the year in which he "closed the book on a very expensive business fiasco, entirely of his own making."

Buffett led GEICO to begin marketing a Berkshire Hathaway proprietary credit card to customers, a mistake that led to a $50 million loss.

"GEICO's managers ... were never enthusiastic about my idea. They warned me that instead of getting the cream of GEICO's customers we would get the - - well, let's call it the non-cream. I subtly indicated that I was older and wiser. I was just older," Buffett conceded in the annual letter.

Where Buffett still believes his age is matched by evolving wisdom is in Berkshire's evolving focus on big acquisitions like Burlington Northern.

A big question for investors has been, are there more acquisitions like Burlington on the horizon? Buffett was his usual cagey self, but did outline why it makes strategic sense for a bulky Berkshire to look at more big acquisitions.

Buffett made the case for Burlington and other big acquisitions through the example of operating subsidiary MidAmerican Energy Holdings. Buffett noted that as a younger man he shunned capital-intensive businesses such as public utilities, and while the "best businesses by far for owners continue to be those that have high returns on capital and that require little incremental investment to grow," Berkshire is simply too big to only make those deals.

Given that Berkshire will generate ever-increasing amounts of cash, Buffett noted that "we are today quite willing to enter businesses that regularly require large capital expenditures."

Buffett directly compared Burlington Northern to MidAmerican, and said that the railroad will be placed within the regulated utility section of Berkshire's results.

Is there going to be more cash deployed by Berkshire Hathaway in acquisitions that fit this same regulated company section of earnings, the same way that Berkshire Hathaway has become one of the largest insurance organizations in the world?

"Overall, we expect this regulated sector to deliver significantly increased earnings over time," Buffett predicted.

As Buffett noted of MidAmerican and Burlington, "in both cases we provide fundamental services that are, and will remain, essential to the economic well-being of our customers, the communities we serve, and indeed the nation... We see a "social compact" existing between the public and our railroad business, just as is the case with our utilities. If either side shirks its obligations, both sides will inevitably suffer. Therefore, both parties to the compact should -- and we believe will -- understand the benefit of behaving in a way that encourages good behavior by the other."

Healthcare, for one, is a fundamental part of the social compact between a nation and its public. Buffett was busy selling shares of UnitedHealth Group ( UNH) and WellPoint ( WLP) throughout 2009, but Buffett had some strong words on Monday about the need for health care reform in the U.S. while speaking to CNBC.

Buffett said during an interview with CNBC that he would prefer to see more aggressive cost-cutting in health care, as it represents such a large and expanding share of the nation's economy, but he said he would back the current federal legislation, a much stronger endorsement of President Obama's health care plan than Buffett offered for the proposed bank tax, which Buffettt had previously told CNBC he thought was stupid.

While there was less discussion of the publicly traded securities owned by Berkshire Hathaway in annual letter than the insurance and operating subsidiaries - and, after all, the public stocks represent a pretty small portion of Berkshire Hathaway -- CNBC did get Buffett to offer a mild endorsement of Coca Cola's ( KO) plans to acquire its largest bottler, saying on balance that he thought he liked it. Berkshire Hathaway owns 8.6% of Coke stock.

Of course, Buffett prefers to make his own acquisitions rather than sit back and wait for other management teams to offer him questionable acquisitions over which to opine in public.

Berkshire Hathaway entered 2008 with $44.3 billion of cash-equivalents. At year-end 2009, Berkshire Hathaway's cash was down to $30.6 billion, with $8 billion earmarked for the BNSF acquisition. The climate of fear over the past few years was "ideal for investors" as Buffett described it.

Buffett noted that a climate of fear is an investor's best friend, and that is why Berkshire has been spending. As fear remains in the markets, and even with its cash level reduced from 2008, there is still a lot of dry powder for Buffett when the next M&A train comes into the Omaha station.

-- Reported by Eric Rosenbaum in New York.


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