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 of
fset 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