America's most famous investor, Warren Buffett, today issued the latest of his celebrated "letters" to investors and reported that his holding company Berkshire Hathaway had achieved a jump in fourth-quarter profit on the recovery of derivative bets tied to the world’s stock markets.

Net income increased to $3.06 billion, or $1,969 a share, from $117 million, or $76, in the same period a year earlier, the company said Saturday in its annual report. Berkshire posted a net income of $8.06 billion for all of 2009, a 61 percent increase from the year before. Rising share prices boosted book value to $131.1 billion, a 4 percent increase since Sept. 30th - - up 20 percent from the end of 2008.

In his annual letter, Buffett said, Berkshire has never had any five-year period beginning with 1965-69 and ending with 2005-09 – and there have been 41 of these – during which the gain in book value did not exceed the gain in the US broad measure index, the Standard & Poor's 500 (S&P). Second, though Berkshire has lagged the S&P in some years that were positive for the market, it has consistently done better than the S&P in the eleven years during which it delivered negative results.

"In other words, our defense has been better than our offense, and that’s likely to continue. The big minus is that our performance advantage has shrunk dramatically as our size has grown, an unpleasant trend that is certain to continue. To be sure, Berkshire has many outstanding businesses and a cadre of truly great managers, operating within an unusual corporate culture that lets them maximize their talents. Charlie and I believe these factors will continue to produce better-than-average results over time. But huge sums forge their own anchor and our future advantage, if any, will be a small fraction of our historical edge."

Charles Munger (b. 1924), is Warren Buffett's business partner and they are both natives of Omaha, Nebrasks, where the billionaire Buffett has lived in the same house since 1958 -- the competitive conspicuous consumption of Wall Street is not for him.

Warren Buffett says: "Just because Charlie and I can clearly see dramatic growth ahead for an industry does not mean we can judge what its profit margins and returns on capital will be as a host of competitors battle for supremacy. At Berkshire we will stick with businesses whose profit picture for decades to come seems reasonably predictable. Even then, we will make plenty of mistakes....

We will never become dependent on the kindness of strangers. Too-big-to-fail is not a fallback position at Berkshire. Instead, we will always arrange our affairs so that any requirements for cash we may conceivably have will be dwarfed by our own liquidity. Moreover, that liquidity will be constantly refreshed by a gusher of earnings from our many and diverse businesses..."

On the housing market, Buffett says:

"The industry is in shambles for two reasons, the first of which must be lived with if the U.S. economy is to recover. This reason concerns U.S. housing starts (including apartment units). In 2009, starts were 554,000, by far the lowest number in the 50 years for which we have data. Paradoxically, this is good news.

 People thought it was good news a few years back when housing starts – the supply side of the picture – were running about two million annually. But household formations – the demand side – only amounted to about 1.2 million. After a few years of such imbalances, the country unsurprisingly ended up with far too many houses.

There were three ways to cure this overhang: (1) blow up a lot of houses, a tactic similar to the destruction of autos that occurred with the “cash-for-clunkers” program; (2) speed up household formations by, say, encouraging teenagers to cohabitate, a program not likely to suffer from a lack of volunteers or; (3) reduce new housing starts to a number far below the rate of household formations.

Our country has wisely selected the third option, which means that within a year or so residential housing problems should largely be behind us, the exceptions being only high-value houses and those in certain localities where overbuilding was particularly egregious. Prices will remain far below “bubble” levels, of course, but for every seller (or lender) hurt by this there will be a buyer who benefits. Indeed, many families that couldn’t afford to buy an appropriate home a few years ago now find it well within their means because the bubble burst."

Bloomberg reports Berkshire’s own stock has gained 52 percent in the past year as derivatives rebounded and the value of the firm’s top stocks rose. The Class A shares closed yesterday at $119,800, their highest since Oct. 21, 2008.

The 20 largest holdings in its US portfolio all increased in the past 12 months. Coca-Cola Co., Berkshire’s top holding, climbed 29 percent. Wells Fargo & Co. doubled and American Express Co. tripled. The U.S. portfolio was valued at $57.9 billion at Dec. 31, a 12 percent rise from a year earlier.

Warren Buffett invested $5 billion in investment bank Goldman Sachs, after the collapse of rival bank Lehman Brothers in Sept 2008. In 1940, the 10-year old Warren and his stockbroker father Howard, who he has called his best friend, boarded a train from Omaha and headed for New York, where they visited the partnership of Goldman Sachs. “That's when I met Sidney Weinberg, who was the most famous man on Wall Street,” Buffett told Alice Schroder, author of his biography, The Snowball.

In his letter Buffett says:"We make no attempt to woo Wall Street. Investors who buy and sell based upon media or analyst commentary are not for us. Instead we want partners who join us at Berkshire because they wish to make a long-term investment in a business they themselves understand and because it’s one that follows policies with which they concur. If Charlie and I were to go into a small venture with a few partners, we would seek individuals in sync with us, knowing that common goals and a shared destiny make for a happy business “marriage” between owners and managers. Scaling up to giant size doesn’t change that truth."

Warren Buffett concludes his letter: "At 86 and 79, Charlie and I remain lucky beyond our dreams. We were born in America; had terrific parents who saw that we got good educations; have enjoyed wonderful families and great health; and came equipped with a “business” gene that allows us to prosper in a manner hugely disproportionate to that experienced by many people who contribute as much or more to our society’s well-being.

Moreover, we have long had jobs that we love, in which we are helped in countless ways by talented and cheerful associates. Indeed, over the years, our work has become ever more fascinating; no wonder we tap-dance to work. If pushed, we would gladly pay substantial sums to have our jobs (but don’t tell the Comp Committee). Nothing, however, is more fun for us than getting together with our shareholder-partners at Berkshire’s annual meeting. So join us on May 1st at the Qwest for our annual Woodstock for Capitalists. We’ll see you there."