Berkshire bounces back

NEW YORK (Fortune) -- Berkshire Hathaway reported today that its book value rose in 2009 by $21.8 billion, a record for the company. The previous record was $16.9 billion, set in 2006.

In the interim between those two handsome results, however, Berkshire suffered its worst year ever -- in crisis-wracked 2008, when book value fell by $11.5 billion. That was only the second decline in Warren Buffett's 45-year history of running Berkshire.

For 2009, Berkshire's per-share book value rose by 19.8%. That came close, but did not measure up, to Berkshire's long-term compounded annual rate of return, which under Buffett has been 20.3%.

Per-share book value changes are the customary way that Buffett reports shareholder results because this method incorporates all of Berkshire's capital gains and losses whether they are realized or not. Increases in stock values were indeed a large reason that Berkshire's book value climbed sharply in 2009.

Under the more commonly used standard, earnings (which do not reflect unrealized gains and losses) Berkshire reported per-share results of $5,193 for 2009, up from $3,224 the previous year. That was an increase of 61%.

The 2009 earnings-per-share results -- and per-share book value also -- were buoyed by $787 million of gains on the combination of investments and derivatives. That's hardly a big figure in Berkshire's world but it was a colossal swing from the $7.5 billion loss that Berkshire suffered on that combination in 2008.

The inclusion of derivatives in Berkshire's book has managed to terrify many a Berkshire shareholder, even though Buffett has expended a lot of words in his annual shareholder letters (which this writer edits) explaining how carefully and rationally Berkshire has built its derivatives portfolio. A major benefit of the company's derivatives contracts, as Buffett sees it, is that they deliver "float" for Berkshire to invest.

Even so, values of derivatives can swing dramatically -- and, to some people, terrifyingly -- from quarter to quarter. In his letter released today, Buffett spells out the periodic results for 2009: a loss of $1.52 billion on derivatives in the first quarter and then three quarters of gains, amounting successively to $2.35 billion, $1.73 billion, and $1.05 billion.

The net of $3.6 billion on the good side will no doubt comfort at least some shareholders, and that swing certainly did a lot for Berkshire's 2009 results.

But in his letter Buffett dismisses the importance -- as he has done in other years -- of these accounting particulars to himself and Charles Munger, Berkshire vice-chairman: "These wild swings neither cheer nor bother Charlie and me." The two, he says, are "delighted" by their expectations for the derivatives book.

The operations of Berkshire's businesses, which include scores of companies, took their licks from the recession in 2009 and did not provide much for Buffett to be delighted about. All told, the company's businesses had pretax operating profits of $11.1 billion in 2009 vs. $15.3 billion in 2008, a drop of $4.2 billion.

One operation that stood out -- painfully -- was NetJets, which descended in 2008 to what Buffett called a "staggering loss" of $711 million. Buffett, acknowledging that he should have acted sooner, changed CEOs at NetJets last year. Rich Santulli, architect of the aircraft fractional-ownership business, left as boss. He was replaced by David Sokol, chairman of MidAmerican.

Berkshire's 2009 record does not include its newest and very big acquisition, Burlington Northern Santa Fe, bought in a deal that closed on February 12th. This purchase, which cost Berkshire $26.5 billion, will add perhaps $16 billion in revenues to the $112 billion that Berkshire reported for 2009. Berkshire is already in the top 20 of the Fortune 500 and the Burlington deal should push it a few notches higher (though probably not into the top 10 -- unless Buffett pulls off another big acquisition in 2010).

Already the Burlington acquisition has caused Buffett to split Berkshire B (BRKB) stock 50 to 1 and led to the inclusion of that stock in the S&P 500. Its presence there required index funds to load up on Berkshire stock, taking their pick of the B stock or its much costlier relative, the A stock (BRKA, Fortune 500). The split and the S&P embrace have recently caused each class of stock to rise around 20%.

From the March, 2009 lows, when the A stock was about $70,000, it has climbed to just under $120,000.

The writer of this article, Fortune senior editor-at-large Carol Loomis, is a friend of Warren Buffett's and a Berkshire shareholder. She has been the pro bono editor of his annual chairman's letter for more than 30 years.