A year after Berkshire Hathaway completed its biggest acquisition, CEO Warren Buffett is on the hunt again. 
 
 Buffett told Berkshire (BRKA) shareholders in his annual letter to them Saturday that they should brace for more megadeals along the lines of last February's $26 billion buy of railroad Burlington Northern Santa Fe. 
 
 "Our elephant gun has been reloaded, and my trigger finger is itchy," Buffett said. 
 
 Buffett may not strike you as much of a hunter. In the public's mind, Buffett is a gatherer of blue-chip stocks such as Coca-Cola (KO) that he buys on the cheap and holds forever. His success in that endeavor has been immeasurably aided by his access to cheap funding via the insurance companies that Berkshire runs. 
 
 But while the insurance-funded investment business still accounts for much of Berkshire's value, the future lies elsewhere. More and more of Berkshire's gains come from a growing stable of 68 non-insurance companies, ranging from giant Burlington Northern to niche operators like Business Wire and See's Candies. 
 
 "For the past 10 years we have seen a clear strategic shift toward buying wholly owned businesses over publicly traded stocks," said Whitney Tilson, a Berkshire shareholder and value investor who runs the $23 million Tilson Focus fund. 
 
 Why? Size is one factor. As Buffett has often lamented, the bigger Berkshire gets the more difficult it becomes to move the needle with a winning investment. The scale of the firm's $158 billion investing portfolio "is absolutely an anchor on performance," says Tilson. 
 
 For now, the value of that portfolio dwarfs the flows coming from the operating businesses. The investments were worth $94,730 a share at the end of 2010, Saturday's letter says. Per-share pretax earnings at Berkshire's noninsurance companies were worth $5,903 per share. 
 
 But the operating-company earnings stream is plenty valuable in its own right – a point Tilson makes in a slide show on his web site. 
 
 Even at a conservative multiple of, say, 7 times earnings, Berkshire's operating businesses alone are worth $42 billion before taxes. That exceeds the market value of warehouse retailer (and Berkshire holding) Costco (COST), for instance, though the numbers aren't strictly comparable because of the tax treatments. 
 
 Moreover, the earnings stream expanded at a 20% annual clip over the past decade – compared with a just 6.6% yearly increase in the value of the investment portfolio. 
 
 The earnings expansion stands to pick up in coming years if Berkshire succeeds in finding more big deals. The motivation is clear. 
 
 Consider the Burlington Northern purchase, which was half again as big as the previous biggest Berkshire acquisition, the 1999 purchase of insurer General Re. Buffett said in last year's letter that the decision to make the cash-and-stock deal was "a close one," because he doesn't like issuing Berkshire stock. 
 
 But he said in Saturday's letter that the railroad is "working out even better than I expected," boosting Berkshire's after-tax earnings capacity by more than 30%. Thanks in part to the strong flow of Burlington Northern earnings, Berkshire now can expect to generate around $12 billion in profits in a typical year, Buffett says. 
 
 That number may take a hit this year and next as some of the sweet deals Berkshire negotiated during the financial crisis – including a $5 billion investment in Goldman Sachs (GS) and a $3 billion purchase of General Electric (GE) preferred stock -- run off. 
 
 But losing a few hundred million in dividends here and there hardly slows the torrent of cash that comes pouring into Berkshire every day. Buffett said in last year's letter that he liked Burlington Northern in part because it gave Berkshire a way to put $22 billion to work in one shot. 
 
 Now, just a year after it swallowed the railroad, Berkshire is back to $38 billion in cash and cash equivalents. 
 
 With Buffett having sworn off dividends and stock repurchases, that money has to go somewhere. So which elephants might Buffett be after? 
 
 Tilson, for one, puts long odds on another megadeal. He notes that Berkshire already owned nearly a third of Burlington Northern before saying in late 2009 it would acquire the rest. 
 
 He views serial purchases of somewhat smaller, closely held businesses – along the lines of Berkshire's 2006 purchase of the Israeli metalworking company Iscar or the ongoing acquisition of the Pritzker family's Marmon Group – as a better bet. 
 
 "I think Buffett would love to buy 10 more Iscars," said Tilson. "I'm sure he would love to buy Mars at the right price," he adds -- though there's no sign that sweet deal is likely to present itself any time soon. 
 
 So 2011 will find Buffett in his familiar posture of looking for an opening – whatever that takes the form of an elephant or something less grand. 
 
 As Tilson says, "I don't think he spends a lot of time thinking about how he has to have any particular deal. It's much more opportunistic than that." 
 
 Also on Fortune.com: 
 
 (A member of FORTUNE's staff, senior editor at large Carol Loomis, edits the chairman's letter in Berkshire's annual report.) ||||| Lucas Jackson/Reuters 
 
 Warren E. Buffett does not put a title on his annual letter. But if he did, this year’s dispatch might be headlined “God Bless the U.S.A.” 
 
 In the face of persistent worries about the American economy, the country’s most famous — and closely followed — investor struck a patriotic tone in his annual report to shareholders of his company, Berkshire Hathaway, writing that “money will always flow toward opportunity, and there is an abundance of that in America.” 
 
 Mr. Buffett said Berkshire spent more than $5 billion last year on property and equipment in the United States – more than 90 percent of the company’s total expenditure – and that the overwhelming part of the company’s future investment would be at home. 
 
 “The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and effective,” he wrote. 
 
 “Now, as in 1776, 1861, 1932 and 1941, America’s best days lie ahead.” 
 
 Dispensing financial observations in a folksy manner, the yearly dispatch from the 80-year-old Mr. Buffett has become something of a state of the union address for Wall Street and, more broadly, for the global economy. 
 
 But the letter also serves as an update for Mr. Buffett’s most important constituency – the shareholders in Berkshire, an investment holding company. 
 
 Mr. Buffett wrote that Berkshire had net income of $13 billion last year, about 61 percent higher than in 2009. The company also reported a 13 percent rise in book value. 
 
 Shares of Berkshire Hathaway, which peaked in late 2007 at more than $148,000 apiece, closed Friday at $127,550. They rose about 29 percent in 2010, more than double the performance of the broader stock market. 
 
 Mr. Buffett also highlighted smaller numbers in trumpeting the thrifty culture at Berkshire, which operates from modest offices in Omaha, Neb. He and his business partner, Charlie Munger, “treat your money as if it were our own,” he wrote to his shareholders. 
 
 “At Berkshire’s ‘World Headquarters’ our annual rent is $270,212,” he wrote. “Moreover, the home-office investment in furniture, art, Coke dispenser, lunch room, high-tech equipment – you name it – totals $301,363.” 
 
 Beyond the flag-waving, the letter provides fodder for investors and business executives who look to Mr. Buffett for sage advice. In a two-page discussion of “intrinsic value” – a favorite security analysis concept of Mr. Buffett’s and his investment hero, Benjamin Graham – he emphasized the importance of having the right chief executive in place. 
 
 “The difference in outcome can be huge,” Mr. Buffett said. “A dollar of then-value in the hands of Sears Roebuck’s or Montgomery Ward’s C.E.O.’s in the late 1960s had a far different destiny than did a dollar entrusted to Sam Walton.” 
 
 Those looking for clear insights into Mr. Buffett’s succession plans, one of Wall Street’s favorite parlor games, will be disappointed. He praised the head of his large insurance business, Ajit Jain (“even kryptonite bounces off Ajit”); lamented the retirement of one potential successor, Lou Simpson (“one of the investment greats”); and praised a new hire, the unheralded hedge fund manager Todd Combs (hopefully “a two-year-old Secretariat”). But there was no specific mention of a succession plan. 
 
 Mr. Buffett has said that when he dies his job will be split into three positions: a chairman, a chief executive and a chief investment officer. 
 
 Though his letter was largely free of negativity, Mr. Buffett used the hiring of Mr. Combs – and his relatively modest compensation arrangement – to take a swipe at the hedge fund industry. 
 
 “The hedge-fund world has witnessed some terrible behavior by general partners who have received huge payouts on the upside and who then, when bad results occurred, have walked away rich, with their limited partners losing back their earlier gains,” he wrote. Mr. Buffett also mocked fund consultants who “like to require style boxes” — or investment categories — “such as ‘long-short,’ ‘macro,’ ‘international equities.’ At Berkshire our only style box is ‘smart.’” 
 
 Mr. Buffett addressed one of Berkshire’s most closely watched holdings on Wall Street, the $5 billion investment in Goldman Sachs made during the depths of the financial crisis. He explained that Goldman has the right to repurchase his preferred shares, which have sharply increased in value, on 30 days notice. Goldman, he wrote, “has been held back by the Federal Reserve (bless it!), which unfortunately will give Goldman the green light before too long.” 
 
 Mr. Buffett attributed much of the year’s success to his acquisition of Burlington Northern Santa Fe railroad, calling it the highlight of 2010. The $26 billion deal, he said, has increased his company’s earnings power by more than 30 percent. But Mr. Buffett also trumpeted the benefits of rail travel beyond profits. 
 
 “Railroads have major cost and environmental advantages over trucking, their main competitor,” Mr. Buffett said. “Our country gains because of reduced greenhouse emissions and a much smaller need for imported oil. When traffic travels by rail, society benefits.” 
 
 He said that the railroad would need to invest in its infrastructure in order to expand its business, and that Berkshire was ready to spend on that. 
 
 “However slow the economy, or chaotic the markets, our checks will clear,” he said. 
 
 Mr. Buffett also teased his shareholders – and Buffett-watchers – in writing that he was on the hunt for “more major acquisitions.” 
 
 “We’re prepared,” he wrote. “Our elephant gun has been reloaded, and my trigger finger is itchy.” ||||| OMAHA, Neb. (AP) — The United States' economy is in better shape than the presidential candidates make it seem, investor Warren Buffett said Saturday, even though businesses like his still face challenges. 
 
 In his annual letter to Berkshire Hathaway shareholders, Buffett didn't name specific candidates or issues, but noted that the negative drumbeat about the economy, health care reform and income inequality may get voters down about the future. 
 
 "It's an election year, and candidates can't stop speaking about our country's problems (which, of course, only they can solve)," he said, adding later, "that view is dead wrong: The babies being born in America today are the luckiest crop in history." 
 
 Buffett noted that there will still be economic troubles as business evolves, but that the country needs to make sure it has a solid safety net to help people who lose jobs. 
 
 "The answer in such disruptions is not the restraining or outlawing of actions that increase productivity. Americans would not be living nearly as well as we do if we had mandated that 11 million people should forever be employed in farming," he wrote. 
 
 Buffett pointed out that change also creates challenges for Berkshire's businesses. For instance, its BNSF railroad is certain to haul less coal in the future and Geico insurance could be hurt by driverless cars. 
 
 He assured shareholders that Berkshire's businesses will adapt just as the company did when its original Berkshire Hathaway textile operation failed. 
 
 Buffett's letter is one of the most well-read documents the business world each year because of his successful track record and his knack for explaining complicated subjects in simple terms. 
 
 Buffett said the book value of Berkshire's businesses improved 6.4 percent last year even as its stock price fell 12.5 percent. When dividends are factored in, the S&P 500 gained 1.4 percent by comparison. Buffett has warned that it will be increasingly hard for Berkshire to continue beating the market because the company is so large. 
 
 Berkshire Hathaway employs more than 360,000 people at its eclectic mix of companies, including insurance, utilities, railroad, manufacturing and retail firms. Berkshire also holds significant stakes in Coca-Cola, Wells Fargo, American Express, IBM and other companies.
– Warren Buffett says he's looking to pull off another major deal on the scale of last year's big railroad purchase. "We're prepared," he writes in his closely watched annual letter to Berkshire Hathaway shareholders. "Our elephant gun has been reloaded, and my trigger finger is itchy." (Read the letter in full here.) After a big gain in earnings, Berkshire is sitting on about $38 billion in cash, the highest amount since 2007, reports the Wall Street Journal. Despite his optimism for the US recovery—the report may as well be titled "God Bless the USA," notes the New York Times' Dealbook blog—it wasn't all rosy news: Even though the company's book value increased by 13%, it failed to beat the growth of the S&P (15%) for the second year in a row—a rarity for Buffett. "The bountiful years, we want to emphasize, will never return," he writes. "The huge sums of capital we currently manage eliminate any chance of exceptional performance." Click for one analyst's skepticism that another "megadeal" is in the offing.