Warren BuffeTt admits he made a major mistake in investing in an oil company in 2008 and that his company, Berkshire Hathaway (BRK.A), had its worst year ever. But in his widely anticipated annual shareholder letter, released Saturday morning, one of the world's best-known investors expressed confidence in his company s myriad of businesses and the overall resilience of the American way of life. He s certain the U.S. economy will be in shambles throughout 2009 and probably well beyond but he writes America s best days lie ahead.

Berkshire s book value per share, the metric Buffett uses to track performance, fell nearly 10 percent in 2008, its biggest decline since Buffett took over in 1965 and only the second year in 44 years where the company had negative results. Berkshire Hathaway's stock has fallen 44 percent since he wrote his last shareholder letter a year ago.

Buffett's major mistake in 2008 was buying a large amount of ConocoPhillips stock when oil and gas prices were near their peaks. He writes that he didn t anticipate the dramatic fall in energy prices that occurred in the second half of the year. The purchase has cost Berkshire several billion dollars so far. I still believe the odds are good that oil sells far higher in the future than the current $40 to $50 price, he writes. But so far I have been dead wrong.

Buffett often uses his annual letter to reflect on the state of the economy as a whole, and this year s letter is no exception. He says the U.S. government was right to throw money to save the financial system in 2007, but warns of the onslaught of inflation that will likely result from the massive government intervention in the markets. C.J. MacDonald, portfolio manager with Westwood Management, says Buffett s mention of inflation struck him as the most unexpected point in the entire letter, coming at a time when most are focused on negative economic growth and worries about deflation.

Buffett also warns of a bubble in U.S. Treasury bonds, saying that clinging to long-term government bonds at their present low yields is almost certainly a terrible policy if continued for long.

Buffett writes that his controversial derivative contracts have resulted in a $5.1 billion mark-to-market loss to date. Buffett s company has a $37.1 billion bet that four major stock indices around the world will not be worth zero in 2019. Steven Rog , comanager of the Rog Partners Fund and a Berkshire shareholder, took Buffett s paper loss on the derivatives contracts in stride and says he isn t concerned about the ultimate outcome: If the markets are where they are now (at the termination dates), we ll have worse things to worry about than these contracts.

Among other highlights:

Buffett on the resiliency of the United States: "Amid this bad news, however, never forget that our country has faced far worse travails in the past. In the 20th Century alone, we dealt with two great wars (one of which we initially appeared to be losing); a dozen or so panics and recessions; virulent inflation that led to a 211/2% prime rate in 1980; and the Great Depression of the 1930s, when unemployment ranged between 15% and 25% for many years. America has had no shortage of challenges. Without fail, however, we ve overcome them. In the face of those obstacles and many others the real standard of living for Americans improved nearly seven-fold during the 1900s, while the Dow Jones Industrials rose from 66 to 11,497. Compare the record of this period with the dozens of centuries during which humans secured only tiny gains, if any, in how they lived. Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America s best days lie ahead."

On the housing crisis: "Commentary about the current housing crisis often ignores the crucial fact that most foreclosures do not occur because a house is worth less than its mortgage (so-called upside-down loans). Rather, foreclosures take place because borrowers can t pay the monthly payment that they agreed to pay. Homeowners who have made a meaningful down-payment derived from savings and not from other borrowing seldom walk away from a primary residence simply because its value today is less than the mortgage. Instead, they walk when they can t make the monthly payments. Home ownership is a wonderful thing. My family and I have enjoyed my present home for 50 years, with more to come. But enjoyment and utility should be the primary motives for purchase, not profit or refi possibilities. And the home purchased ought to fit the income of the purchaser. The present housing debacle should teach home buyers, lenders, brokers and government some simple lessons that will ensure stability in the future. Home purchases should involve an honest-to-God down payment of at least 10% and monthly payments that can be comfortably handled by the borrower s income. That income should be carefully verified.

Putting people into homes, though a desirable goal, shouldn t be our country s primary objective. Keeping them in their homes should be the ambition."

Read Buffett's shareholder letter in its entirety here.