Buffett letter is hopeful, despite his worst year at Berkshire

— -- Hurt by big losses in Berkshire's stock portfolio as well as bets on derivatives, the company's net earnings for the year fell to $5.0 billion, which eroded the company's book value.

Book value, the difference between assets and liabilities, and the way Buffett prefers to track the company's performance, dropped 9.6%. Not only was that Berkshire's largest drop in history, it was also only the second time going back to 1965 that it fell.

Still, Buffett, nicknamed the Oracle of Omaha, remains one of the world's most successful investors. Buffett is head of Berkshire, a diversified company that operates businesses that sell everything from insurance to electric power and candy. Berkshire takes the cash from those businesses to invest.

Buffett's annual letter to Berkshire shareholders, released Saturday, reflects a year hurt by economic recession and falling investment prices. Investors have been awaiting the update, as shares of Berkshire Hathaway fell 31.8% in 2008 and have lost another 18.6% of their value so far in 2009. Berkshire's Class A stock closed Friday at $78,600 a share.

"It was a sober report, but it has to be in times like these," says Andy Kilpatrick, author of "Of Permanent Value: The Story of Warren Buffett."

Some key points from Buffett's letter to shareholders:

• He expects the U.S. economy to remain weak in 2009. Pointing to the tremendous strain on companies and state and local governments, Buffett says the economy is likely to "be in shambles throughout 2009 — and, for that matter, probably well beyond." He says business activity has fallen "at a pace I have never before witnessed." However, that doesn't necessarily indicate whether the stock market will rise or fall, he writes.

• He is concerned about the consequences of the federal government's moves to stabilize the financial system and the economy. "Economic medicine that was previously meted out by the cupful has recentlybeen dispensed by the barrel," he writes. But, he says, "Whatever the downsides may be, strong and immediate action by government was essential last year ifthe financial system was to avoid a total breakdown."