Buffett's biggest bets

NEW YORK (Fortune) -- Berkshire Hathaway said Friday that its net worth rose by $12.3 billion in 2007, as the company's insurance operations benefited from a year free of major catastrophes, and its 66 non-insurance businesses, as a whole, gained in profits.

The Omaha-based conglomerate, run by billionaire investor Warren Buffett, said the 2007 results boosted Berkshire's per-share book value by 11% from year-earlier levels. Buffett focuses on per-share book value, rather than earnings, because doing so takes account of all of Berkshire's capital gains and losses, whether realized or not.

The 2007 performance - double the total return of the S&P 500 - came on top of an 18.4% gain for 2006, another benign year for insurance. Historically, the company's book value has grown at a 21.1% rate, compounded annually, since Buffett took over at Berkshire in 1964. That percentage, too, is roughly double the S&P 500's total return.

The investment section in Buffett's 2007 chairman's letter shows that Berkshire (BRKA, Fortune 500) put significant money into stocks last year and also made one highly profitable sale, of its Petrochina holdings.

Commenting on investments, though, Buffett chose to focus first on the "business performance" of Berkshire's investees, which overall, he said, "delighted" him. He noted that of Berkshire's four largest investments, three - American Express (AXP, Fortune 500), Coca-Cola (KO, Fortune 500), and Procter & Gamble (PG, Fortune 500) - increased their per-share earnings by 12%, 14%, and 14% respectively. The fourth, Wells Fargo (WFC, Fortune 500), had a small decrease in earnings.

Coke and P&G also gained in the stock market - Coke by 27%. But Wells Fargo and American Express were among a half-dozen financial stocks that Berkshire owned as it went into 2007 and that, in the turbulence of the credit crisis, fell in price. Hardest hit among the 18 stocks listed in the annual report - these were all in Berkshire's portfolio having a yearend value of at least $600 million - was Moody's (MCO). Its stock price was just about halved during the year as the quality of the company's ratings on fixed-income securities came under attack.

Buffett greeted the credit crisis by selectively increasing Berkshire's investment in financial stocks it owned as the year began. In particular, he poured a total of $4.4 billion into Wells Fargo and U.S. Bancorp, raising Berkshire's percentage ownership of each - to 9.2% for Wells and 4.4% for U.S. Bancorp. The figures in Berkshire's list, compared with those published a year earlier, indicate that Berkshire paid an average of $35 for the Wells' shares it bought in 2007, which is a few dollars above their price today. It meanwhile paid an average of $33 for U.S. Bancorp shares, a price almost identical to today's.

Berkshire also owned Johnson & Johnson as 2007 began, and Buffett put another $2.7 billion into the stock during the year. The information released by Berkshire indicates that it bought at an average of $63 per share, which is roughly J & J's price today.

Berkshire's 2007 list of stocks includes three that were not on its 2006 list: Burlington Northern, into which Berkshire had put $5 billion at the end of the year and has continued to buy in 2008; Kraft, $4.2 billion; and French pharmaceutical company Sanofi-Aventis, $1.6 billion. At the end of 2007, Berkshire had a small profit in Burlington and Sanofi, and a small loss in Kraft.

In the 2006 Berkshire annual report, Buffett noted that Berkshire's list of stocks deliberately omitted two that he was still buying. "I could, of course, tell you their names," he said. "But then I would have to kill you." A year having passed, so has this threat of termination, because Berkshire ultimately filed reports with the SEC that would have allowed detectives to determine which two he was talking about.

Therefore the writer of this online item, Carol Loomis, who has edited Buffett's letter in Berkshire's annual report for 31 years (without pay, by the way), can now say that one of those two stocks was Burlington, which Berkshire began buying in 2006. The other stock unmasked by the SEC filings was Union Pacific, in which Berkshire had a $756 million holding at the end of 2006 and still a bigger position a quarter later. But Berkshire has since sold some UP shares, and the value of its yearend position was only $559 million, not big enough for the 2007 list.

Berkshire acquired its holdings of PetroChina (PTR) in 2002 and 2003 for $488 million and sold in 2007 for $4 billion. Explaining the sale, Buffett says in his letter that the value of PetroChina had grown far beyond what he expected when Berkshire bought its stock and that by last year he believed its worth to be comparable to that of other giant oil companies. "So we sold," he wrote.

He added that the $1.2 billion of federal tax Berkshire paid on its gain was enough to pay all costs of the U.S. government - "defense, social security, you name it" - for about four hours.