Investment guru Warren Buffett offered a mea culpa as he delivered a host of bad news to shareholders, saying Berkshire Hathaway Inc. saw net income fall by 62 per cent in 2008 compared to a year earlier.

The avowed bargain hunter confessed in a letter to shareholders, released Saturday, that even he got caught up in the mania surrounding oil prices and bought a large amount of ConocoPhillips stock when oil and gas prices were near their peak.

"I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year," Buffett wrote. "I still believe the odds are good that oil sells far higher in the future than the current $40-$50 price. But so far I have been dead wrong."

The bad investment cost the Omaha-based company several billion dollars, making 2008 the worst year in Buffett's 44-year history of managing Berkshire Hathaway. Net income for 2008 was $4.99 billion US, or $3,224 per Class A share, down from last year's $13.21 billion, or $8,548 per share.

'Jimmy Stewart would have loved these folks.' — Warren Buffett describes his firm's borrowers

Another mistake was a $244-million purchase of two small Irish banks that "appeared cheap" at the time. Berkshire has since written down the holdings to $27 million, for an 89 per cent loss.

Of that investment, Buffett wrote: " The tennis crowd would call my mistakes 'unforced errors'."

Buffett detailed his investment triumphs and errors in his usual plain-spoken manner, praising managers by name, offering opinions on the current financial crisis, and calling upon shareholders and Americans to get back in the malls and shop.

He also castigated Wall Street bosses and lax government regulators for getting America into the current crisis, and wrote about the dangers of derivatives, one of the tools blamed in the collapse of the global financial system.

"When I read the pages of 'disclosure' in 10-Ks of companies that are entangled with these (derivative) instruments, all I end up knowing is that I don't know what is going on in their portfolios (and then I reach for some Aspirin)."

Some derivatives less perilous than others?

Having said that, he acknowledged that Berkshire Hathaway is party to 251 derivatives contracts, and offered an explanation as to why these derivatives were different from the others.

"I believe each contract we own was mispriced at inception, sometimes dramatically so," he wrote, adding that he alone initiated the move to put money into such speculative investments.

He said he considers himself Chief Risk Officer. "If we lose money on our derivatives, it will be my fault."

He also talked about the mortgage operation of Clayton Homes, the largest maker of manufactured homes, which is a component of Berkshire Hathaway. He proudly stated that Clayton's lending arm had among the lowest default rates among subprime borrowers: 3.6 per cent, compared to 2.9 per cent in 2006 and 2.9 per cent in 2004.

Buffett explained that Clayton borrowers were given mortgages that matched their ability to repay and didn't use teaser rates that reset to disastrously high monthly payments.

"Jimmy Stewart would have loved these folks," he wrote.

In the future, however, Clayton may not be able to compete with banks that have received bail-outs, despite the company's sterling AAA credit rating, Buffett said.

"Our cost of borrowing is now far higher than competitors with shaky balance sheets but government backing. At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one," he wrote.

Amid this bad news, Buffett reminded shareholders that the U.S. has faced much worse in the past century, and will recover. "America’s best days lie ahead."

With files from Associated Press