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Each year for the last 27, Berkshire Hathaway(NYSE: BRK.A) Chairman Warren Buffett pens a "state of the company" letter to Berkshire shareholders that delves into investing issues, economic issues, and what Mr. Buffett perceives to be a coarsening of standards among American public company executives. For the first time, he allowed Fortune magazine, employer of long-time Buffett Letter editor Carol Loomis, to print advance excerpts from the letter.

This year's major lesson is on derivatives -- their accounting, the threat they pose both to corporations and economies in general, and why Berkshire Hathaway is in the process of getting out of a derivatives business it acquired along with reinsurer General Re.

Buffett warns that no central authorities offer protection to the stronger counterparties in derivative transactions in case of default by weaker ones -- a situation that could cause a wholesale collapse of the market, should an event of certain magnitude align circumstances that seem unrelated (another Long Term Capital Management fiasco writ large).

He also says he has made few investments in stocks in the past year, and he still hasn't found many compelling values. Though he believes that things are much better for investors now than they've been in the past three years, the fact that he is not active in stocks, he says, points to "the insanity of valuations reached during The Great Bubble. Unfortunately, the hangover may prove to be proportional to the binge."

Buffett reaffirms that his general preference is to own common stocks -- he hasn't changed his overall bias toward them, but he would prefer for money to sit in cash than to chase inferior opportunities.

The rest of the letter comes out on Saturday on the Berkshire website. If these tastes are any indication, it's going to be a barn burner.

Bill Mann owns shares of Berkshire Hathaway.