Warren Buffett's Berkshire Hathaway Inc said fourth-quarter profit surged, helped by derivatives bets tied to global stock markets, though operating profit fell 40 percent as the weakened economy weighed on several businesses.

Profit rose for a third straight quarter, and full-year profit increased 61 percent, as Berkshire rebounded from perhaps its worst year since Buffett took over in 1965.

I was quite impressed with the results, said Vahan Janjigian, author of the book Even Buffett Isn't Perfect.

It is clearly suffering from the economic recession we have been in, but compared with most other companies involved in similar businesses, it is doing quite well, he added.

In his annual letter to Berkshire shareholders, Buffett admitted that Berkshire's ability to outperform that benchmark has shrunk dramatically, and that our future advantage, if any, will be a small fraction of our historical edge.

Net worth per share, which measures assets minus liabilities and is a key metric for Buffett, rose 19.8 percent, compared with a 9.6 percent drop a year earlier.

Still that lagged a 26.5 percent gain including dividends for the Standard & Poor's 500, the first time it trailed since 2004. Berkshire's net worth per share is up 20.3 percent annually since 1965, while the S&P 500 is up 9.3 percent. Total book value rose to $131.1 billion from $109.27 billion.

Buffett, who in last year's letter said the economy would be in shambles in 2009, this year struck a more optimistic note. He said residential housing problems should largely be behind us within about a year as supply falls into line with demand, though prices will remain far below 'bubble' levels.

He also used the letter to lambaste financial industry chief executive officers and directors for bad risk management, suggesting that shareholders have borne too much of the burden of recent massive government bailouts.

A board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control, he said. If he fails at it -- with the government thereupon required to step in with funds or guarantees -- the financial consequences for him and his board should be severe.

NET RISES, OPERATING NET FALLS

Fourth-quarter net income for Omaha, Nebraska-based Berkshire rose to $3.06 billion, or $1,969 per Class A share, from $117 million, or $76, a year earlier. Revenue rose 23 percent to $30.2 billion.

Excluding $1.03 billion of investment and derivative gains, operating profit to $2.03 billion, or about $1,308 per share, from $3.37 billion, or $2,175.

On that basis, analysts on average expected $1,208 per share, according to Thomson Reuters I/B/E/S.

Year-earlier results reflected $3.25 billion of investment and derivative losses, and a one-time fee related to an aborted takeover of Constellation Energy Group Inc.

For all of 2009, profit rose to $8.06 billion, or $5,193 per Class A share, from $4.99 billion, or $3,224. Revenue rose 4 percent to $112.49 billion.

Berkshire has about 80 businesses that sell such things as Geico car insurance, Dairy Queen ice cream, and Fruit of the Loom underwear.

Two weeks ago it paid $26.5 billion for Burlington Northern Santa Fe Corp, the nation's second-largest railroad, in Buffett's largest takeover.

That and a related stock split won Berkshire admission to the S&P 500. Berkshire said it will record a $1.1 billion first-quarter gain reflecting a change in how it valued its prior Burlington Northern stake.

In its annual report, Berkshire said operating results for its main business lines, insurance and utilities, have not been negatively impacted in any significant way by the recession.

Among the insurance operations are a property and casualty business and the General Re reinsurance business.

Insurance is a wonderful business, and the absence of super-catastrophes last year helped, said Frank Betz, a principal at Carret/Zane Capital Management LLP in Warren, New Jersey, which owns Berkshire stock.

In contrast, earnings fell at most manufacturing, service and retailing units in 2009, as the recession led to lower sales volume, revenues and profit margins as consumers have significantly curtailed spending, particularly for discretionary items.

NETJETS ON THE MEND

For example, the NetJets plane leasing unit had pretax losses of $180 million in the fourth quarter and $711 million for the year. Its debt had soared to $1.9 billion from $102 million in the 11 years that Berkshire owned it.

I failed you in letting NetJets descend into this condition, Buffett said.

Last year, Buffett installed David Sokol, who chairs Berkshire's MidAmerican Energy unit and is considered a leading candidate to eventually replace Buffett at Berkshire, to repair NetJets' financial condition. Buffett said NetJets debt is down to $1.4 billion, and the unit is now solidly profitable.

Quarterly results included $1.05 billion of pretax gains on derivative contracts, mainly tied to the longer-term performance of stock market indexes.

Buffett said Berkshire changed only a few derivative positions in the last year, and he still believes they will make money. Berkshire also got $6.3 billion of upfront payments from parties on the other side of the contracts, which it can invest as it wishes.

Berkshire ended the year with $30.56 billion of cash, up 20 percent, as Buffett sold stocks such as oil company ConocoPhillips. About $8 billion was reserved for Burlington Northern.

Last year, Berkshire's Class A and Class B shares rose just 3 percent and 2 percent, respectively. This year they are up a respective 21 percent and 22 percent, helped by the addition of Berkshire to the S&P 500.

The A shares closed Friday at $119,800 and the Class B shares at $80.13 on the New York Stock Exchange.

(Reporting by Jonathan Stempel, editing by Vicki Allen)

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