Warren Buffett's just-released annual letter to shareholders features a blistering attack on what he calls the "fanciful figures" of Corporate America's accounting, especially when it comes to assumptions about pension fund returns.

If a company projects larger returns from investments held by a pension fund, then it can lower its pension expenses and raise it's "less-than-solid 'earnings.'"  Buffett notes that the 363 S&P companies with pension funds assume, on average, annual growth of 8 percent.

He then goes through an analysis designed to show that anyone thinking they'll get that kind of return is not thinking realistically.

Most pension funds have about one-quarter of their assets in bonds and cash, generating about a 5 percent return.  That means the remaining three-quarters of assets in stocks need to earn over 9 percent to reach overall 8 percent growth.  And that's after ever-increasing fees.

Buffett points out that the Dow's annual compounded gain was 5.3 percent in the 20th century .. and it was a "wonderful" century.  To match that rate in the 21st century, the Dow would need to close around 2,000,000 at the end of 2099.  (1,988,000 Dow points to go, eight years in.)

Anyone expecting a 10 percent annual gains from stocks this century are "implicitly forecasting a level of about 24,000,000 on the Dow by 2100."  (Buffett suggests you explain the math to any adviser who talks to you about double-digit gains, "not that it will faze him.")  He warns, "Beware the glib helper who fills your head with fantasies while he fills his pockets with fees."

That doesn't mean you shouldn't put money into stocks.  I think it means you shouldn't pay someone to manage your stock investments, just because that person says he or she can get you fantastic returns that beat the overall market.  In the past, Buffett has recommended stock index mutual funds for many 'regular' investors.

The discussion gives context to the question Buffett asked us to ask you about where the Dow will be in 2099.  He'll be talking more about that Monday morning when he joins Becky Quick live in Omaha on CNBC's Squawk Box starting at 6am ET.  I'll also provide "live blog" coverage of the whole thing here on Warren Buffett Watch. 

Buffett and Becky will chat several times during Squawk's three hours.  For the first time ever, Buffett will be answering some of your questions, submitted to us by email.  (Thank you to everyone who has already sent in questions or will be doing so.  We're only sorry Buffett won't be able to answer them all!)

EXPECT LOWER INSURANCE EARNINGS

Buffett's letter also includes a warning about not expecting too much from Berkshire's insurance business.  While it had an "excellent" year, helped by "the second year in a row free of major insured catastrophes," Buffett proclaims, "That party is over."

He says it is a "certainty" profit margins will fall "significantly" in 2008 as prices fall and exposures "inexorably rise."  The result: lower insurance earnings over the next few years.

Berkshire's fourth quarter profit fell 18 percent.  Operating profit, which excludes investments, fell to $2.35 billion, about $1518 a share, below analysts' consensus forecast.

Just as Buffett warns against expecting very large returns on stocks in the future, he also says Berkshire Hathaway won't "duplicate or even approach" its compounded annual gain of 17.8 percent since 1965.  "Our base of assets and earnings is now far too large for us to make outsized gains in the future."  

Berkshire Hathaway current price:

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WHO'S NEXT AT BERKSHIRE HELM?

Buffett briefly addresses the vexing question of who will take over the top job at Berkshire Hathaway when the time finally comes.  He says the company is "well-prepared" for CEO succession with three "oustanding internal candidates."  And he assures us that the board knows "exactly" whom it would select should he suddenly become "unavailable."

Buffett goes on to say that during the past year, Berkshire identified four people who could take over the separate job of managing Berkshire's investments. 

He says all four:

• "Manage substantial sums currently"
• "Indicated a strong interest in coming to Berkshire if called"
• Are "young to middle-aged"
• Are "well-to-do to rich"
• "Wish to work for Berkshire for reasons that go beyond compensation"

Buffett notes that he has "reluctantly" dropped the idea of managing the portfolio after he dies, "abandoning my hope to give new meaning to the term 'thinking outside the box.'"

WHAT'S MISSING?

Unless I missed it, there no discussion of Buffett's recent move into the bond insurance business and not one word about playing bridge in the presence of undressed women.

More bullet points from the letter follow in the continuation ....

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