This coming weekend will mark the one weekend that the hotels, retailers, and restaurants all look forward to in Omaha, Nebraska… Berkshire Hathaway Inc. (NYSE: BRK-A)(NYSE: BRK-B) has its much-anticipated shareholder meeting and this brings in thousands of wealthy visitors who would have otherwise never spent a day there.  While it would be easy to harp on some of the current media issues of today, we want to offer more of a 360-degree preview of what investors should expect in tone and in delivery from Warren Buffett, Charlie Munger, and the rest of the Berkshire Hathaway lot.

Buffett may be even more upbeat this year than last year and probably be 180 degrees better than he was in 2009.  Buffett will also have to again explain how Berkshire Hathaway’s book value changes have underperformed the S&P 500 Index during the rally… The 2010 gain was 13.0% at Berkshire versus 15.1% for the S&P 500, while the 2009 gain was 19.8% versus 26.5% for the S&P.  Maybe Buffett should just point out the obvious that Berkshire Hathaway looks more and more like the weighting of a bond index AND the S&P 500 Index rather than just the S&P 500…The bird in the hand is that Berkshire Hathaway book value was “only” down 9.6% in 2008 while the S&P 500 suffered a whopping loss of 37% and Berkshire Hathaway’s book value rose more than the S&P 500 Index in 2007, 2006, and even 2005.

As of today, we do not yet have the book value per share for the first quarter.  That book value per A-Share was $95,453.00 versus a share price of $120,450.00 at December 31 and versus $124,450.00 as of Tuesday’s closing bell price.  We expect the earnings release to come shortly before the annual meeting this weekend, so we’ll expect an updated book value.

Goldman Sachs Group Inc. (NYSE: GS) is a position that Buffett will not have to deal with now.  Last year his shareholders acted dumbfounded in silence when Buffett defended Lloyd Blankfein by saying he just wished that Blankfein had a twin brother he could hire.  Goldman Sachs has repaid that 10% preferred investment from late-2008, but by our count he still holds those warrants and will use them opportunistically.

General Electric Co. (NYSE: GE) has a longer lock-up period on being able to call away those 10% preferred shares bought in late-2008, and we would expect to hear Warren Buffett telegraph that he expects GE to call the shares away.

The one other big issue we will go ahead and get out of the way is the recent fiasco regarding the David Sokol departure.  He went from being considered by Wall Street as a potential Warren Buffett successor to an ‘insider-insiderless’ trading scandal overnight due to his personal stock trading ahead of and into the Lubrizol Corporation (NYSE: LZ) merger.  Our take, particularly after seeing the reaction from our own independent reader survey, is that this will simply go away… over 49% said it will only affect David Sokol and over 34% said that neither Sokol nor Berkshire will likely suffer any real damage.  The issue, though, is far from settled for now since a Berkshire Board Committee said that Sokol mislead Buffett and other top executives about his stock trading ahead of the Lubrizol deal.

Another portfolio change we expect to hear more about is the BNSF giant railroad acquisition.  This transformed the company, and Buffett has claimed on multiple occasions that this acquisition went far better than he expected.

Our take is that  Ajit Jain seems to be the favorite, if you trace sentiment internally, as Buffett was quoted in a prior annual letter: “If Charlie (Munger), I and Ajit are ever in a sinking boat – and you can only save one of us – swim to Ajit.”  In the most recent annual report, Buffett was quoted as saying, “Ajit has created an insurance business with float of $30 billion and significant underwriting profits, a feat that no CEO of any other insurer has come close to matching. By his accomplishments, he has added a great many billions of dollars to the value of Berkshire. Even kryptonite bounces off Ajit.”

Buffett is also expected to highlight at least some updates to his quarterly holdings, although he is not bound to address anything more for another two and a half weeks when his quarterly filings are required to be made.  As of our latest report, the top holdings were The Coca-Cola Company (NYSE: KO), Wells Fargo & Co. (NYSE: WFC), American Express Company (NYSE: AXP), and Procter & Gamble (NYSE: PG).

We are also still awaiting the new adjusted stance on whether he will unload his position in ConocoPhillips (NYSE: COP).  Lastly, we would like to hear more about this lame duck position in Moody’s Corporation (NYSE: MCO). ConocoPhillips was kept the same at the last quarter despite a lower position than the past, and it is worth noting that shares are back closer to $80 after having fallen from $90 to under $40 before the recovery.  The good news is that Buffett’s adjusted carrying cost basis was $69.67 at the end of 2010 so Buffett now has a decent profit since he did not unload all of it.  As far as P&G, this goes back to Gillette days and Buffett has kept it recently flat at more than 76 million shares after having trimmed it from 96 million shares.  As P&G has an adjusted carrying value of $6.40 on the books, Buffett can keep these shares as long as he wants.

As far as stocks and investments in general, we expect Buffett and his minions to remain positive on the equity market in general.  The market has not crashed since the 2010 annual report, and there Buffett was quoted as saying, “Overall, I believe our “normal” investment income will at least equal what we realized in 2010, though the redemptions I described will cut our take in 2011 and perhaps 2012 as well.”

Another thing investors will likely pay attention to is that Berkshire Hathaway is increasing its capital spending or capital investment.  The figure of $6 billion spent in 2010 was recently put at $8 billion for 2011 and almost all of that increase will take place inside the United States.

Another aspect we expect to hear more about is insurance and reinsurance.  The spate of global earthquakes, particularly in Japan, has to be racking up.  The good news is that so far it seems manageable for Buffett and Berkshire Hathaway.  Buffett claimed in the most recent annual report that there has been an underwriting profit for eight consecutive years. He did hedge in the most recent report that underwriting should be profitable in most, but not all, years ahead.  Due to the Japan disaster, we do not expect that Berkshire Hathaway will make the joke about being smart enough to have avoided hurricanes and natural disasters for two years in a row.  American International Group (NYSE: AIG) reportedly recently paid Berkshire Hathaway some $1.65 billion for Berkshire to assume the risks tied to AIG’s asbestos-related claims.  We expect to hear more of the details on this, particularly about more detail on the “overage” where AIG would have to begin making asbestos payments again (we recorded a figure of anything over $3.5 billion originally).

We expect to hear more about Todd Combs, Berkshire’s newest portfolio manager.  Buffett has so far given only praise, something we’d only expect to continue.  Buffett set a current limit of managing one to three billion dollars but said Combs can reset that annually.  Can we expect more portfolio managers to come into Berkshire?  Maybe… Buffett said in the latest annual report, “Over time, we may add one or two investment managers if we find the right individuals… When Charlie and I are no longer around, our investment manager(s) will have responsibility for the entire portfolio in a manner then set by the CEO and Board of Directors.”

The last portfolio issue we are going to address is the derivatives business.  This has to be in two parts of bonds and stocks…

Buffett would use derivatives more if left entirely up to him.  Buffett has even gone as far saying that Berkshire gets paid upfront, so there is no counterparty risk in these.  The problem is that these are a source of contention on Main Street now and Buffett is routinely attacked for his accounting of those derivatives.  Many fear that Berkshire Hathaway could also be forced to put up additional capital to offset those derivatives.  As such, Buffett noted that Berkshire had 251 derivative contracts in his 2008 annual report.  Buffett recently telegraphed that this was down to 203 contracts.  Buffett is lightening up on these whether he wants to or not.  The company has had to pay off billions in losses in his bond default portfolio, but Buffett can still claim that there is almost $1 billion in profits and that the company has had the use of an interest-free float of about $2 billion over the life of the contracts.

On the equity puts, Buffett has also unwound some of them and as of the end of 2010 he was down to 39 contracts with premiums received of $4.2 billion.  The end of year liability was carried at $6.7 billion for these, but Buffett claims a net settlement value of only $3.8 billion and an expected $2.9 billion gain in the coming years.  Buffett did note that Berkshire will continue to get the use of the remaining free-float of $4.2 billion for an average of about 10 more years.

There was one troubling admission in this last annual report, although it has been known for some time by professional investors… Net income is almost irrelevant when reported.  Yep, it does not matter what Berkshire Hathaway says “net income” is…  Buffett noted in the most recent annual report, “Regardless of how our businesses might be doing, Charlie and I could – quite legally – cause net income in any given period to be almost any number we would like.  We have that flexibility because realized gains or losses on investments go into the net income figure, whereas unrealized gains (and, in most cases, losses) are excluded.”

Berkshire Hathaway has the ability to do more than Lubrizol merger, but we don’t expect this for some time.  The firm indicated recently that it will hold at least $10 billion of cash, and that excludes regulatory capital requirements at the regulated utility and railroad businesses.  Combined, Berkshire Hathaway customarily keeps at least $20 billion on hand to be able to absorb unprecedented insurance losses and so it can quickly jump on investment and/or acquisition opportunities.

Here is the link to the FULL Berkshire Hathaway 2010 Annual Report, which you count on for much guidance in the annual meeting this coming weekend.

Morningstar has allowed readers to contribute a question as its analysts get to briefly ask Warren Buffett and Charlie Munger a question.  They ask, “What would you ask Buffett, if you had the opportunity?”  As for the rest, the announcement with the schedule is here. Here is the full visitor guide with more details on scheduling and events. The current agenda has already laid out the next two annual holder meetings:

• 2012 Annual Meeting May 5
• 2013 Annual Meeting May 4

Lastly, you can expect many of the same colorful analogies from Mr. Buffett.  The odds that he’ll stop claiming “America’s best days are ahead of it” are pretty high.  We’ll leave it up to you as to whether or not you believe that.

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JON C. OGG

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