OMAHA, Neb. -- Amidst the champagne, strawberries and shopping bags from glitzy jeweler Borsheim's, there was tension in the air Friday evening. The first official gathering of this weekend's Berkshire Hathaway (BRK.A Quote) annual meeting -- a reception at which Berkshire Chairman Warren Buffett briefly appeared to greet shareholders -- lacked the bubbly tone of years past.

Shareholder disappointment -- if not outright discontent -- was palpable. "Warren will face some very difficult questions tomorrow," said Bill Lampeteer, a shareholder from Rochester, N.Y. "It won't be as tough as it might have been, but he has some explaining to do."

The need to explain comes from the lackadaisical performance of Berkshire stock over the past year. While the S&P 500 has gained nearly 10% since April 1999, Berkshire is down more than 20%. And, for the first time since Buffett took the reigns, Berkshire stock is underperforming both the S&P 500 and the Nasdaq over a trailing three-year period.

For Berkshire shareholders, and especially for Buffett as he answers questions from questions at today's annual meeting, it could be worse. On April 14, Berkshire's stock performance climbed above the indices on a year-to-date basis. Nasdaq's volatile decline has, at least temporarily, taken some of the edge off of shareholder criticism of the once-heralded Oracle of Omaha.

"If this meeting would have been three weeks ago, they may not have tarred and feathered Buffett, but the message would have been similar," says long-time shareholder Frank Booker of St. Simon Island, Ga. "The message is clear: He needs to diversify, he needs to move away from the Old Economy stocks like Coke (KO Quote) and Gillette (G Quote) and look at technology because that's where the growth is."

Buffett has been widely criticized for avoiding technology stocks -- stocks he claims he does not understand, and whose valuations he decries as "wildly optimistic." While Becker agrees, he sees little difference between the valuations of the upper echelon of technology and some of Buffett's core holdings. "Some of the multiples in technology may look ridiculous. But Coke trades at 40 times earnings, which is ridiculous, especially given their horrendous performance over the past couple of years."

Not all shareholders agree, suggesting patience is key when investing in Berkshire. "I don't think that all shareholders have a long-term thought process," says Bong Jung, of Saginaw, Mi., who has held Berkshire since 1990. "If you think too much about the stock price, you'll be disappointed with Berkshire."

The split in opinions on Buffett's recent performance and his future seem to fall along generational lines. Older shareholders seem to favor the patient, disciplined approach espoused by Buffett, while younger shareholders are more critical of his technophobia. Said 82-year-old shareholder Elsie Hanson from Lyons, Neb.: "He's done very well until now. I think with the gains he's had over the years, he can take a few bad years along with it."

The Berkshire "generation gap" concerns at least one long-time Buffett watcher and shareholder. "A very important question is how we recruit a new generation of shareholders to replace the old guard," says Robert Hagstrom, portfolio manager of the LeggMason Focus Trust and author of The Warren Buffett Portfolio. He says older shareholders are beginning to liquidate positions in retirement or estate settlements. "New shareholders are likely to have a new economy focus. They will be hard to get into the game without a New Economy bent. As it stands today, finding a new generation of buyers could be a real challenge."

On one issue, most shareholders agree. The 1998 acquisition of General Re has not gone as planned. In 1999, Berkshire posted a $1.4 billion loss from reinsurance underwriting. "The General Re merger was not a Buffett highlight," says Tom Gumpert, a shareholder from St. Joseph, Mo. "He's got a lot of work to do to make it work."

That's an opinion every shareholder appears to hold, although there is light at the end of the tunnel. "Cheap float (the difference between insurance premiums collected and claims paid) is critical in the insurance industry and General Re has increased Berkshire's costs," says Kenneth Shubin Stein, principal in New York hedge fund Compo Asset Management. "It looks like it will take several years to make this deal work." He said that in the long term -- the next five to 10 years -- the acquisition will actually reduce the cost of Berkshire's float. Still, the interim pain has some shareholders wishing Buffett could go back in time.

"I wish we could give the damn thing back," said Frank Becker, echoing the sentiment from insurance-savvy shareholders about the massive General Re losses in 1999.

So, what are shareholders doing in light of Buffett's recent whipsaw performance? Some, like Becker, have sold. Because Buffett didn't diversified for him, Becker did it on his own, swapping Berkshire shares for stock in core technology companies like Cisco (CSCO Quote) and Intel (INTC Quote).

Others are buying. For example, Rich Joseph bought his first shares after the General Re merger in 1998 and bought more days before the annual report was released in March. "The stock was just too cheap and good protection against an overvalued market."

Many are content to hold and enjoy the chance to see Buffett and experience this capitalist version of Woodstock. Said the 76-year-old Gumpert, "This is a great party and its gets more fun every year. After all, I'm not going to sell."

As for Buffett, come the end of the day, he hopes most people are here for the party and leave feeling exactly the same way. After all, he's not selling either.

Making the Rounds

Buffett made the rounds Friday, stopping at investment club gatherings and other parties and ending his day at the Borsheim's party. "I feel great," he said. "This is a great time of year."

He tried to avoid any substantive questions, preferring to shake hands and sign autographs. "Tomorrow we'll work," he quipped.

But pushed for at least one comment on the news of the day -- the Justice Department and state attorneys general's proposal to break Microsoft (MSFT Quote) in two as a remedy for the company's monopoly transgressions -- Buffett finally relented. He is close friends with Microsoft Chairman Bill Gates and recently revealed a stake in a convertible Microsoft security. "I've answered that question so many times," Buffett said. The government shouldn't tinker."

Later today: The Main Event -- The Berkshire Hathaway annual meeting and Buffett's long-awaited response to shareholder questions and shareholder reaction. And, on Sunday, we'll follow up with coverage of Buffett's news conference and a candid conversation about the weekend with a long-time Omahan and Buffett follower.

Don't forget to join us on the message boards to weigh in with your thoughts. And, on Tuesday, join Robert Hagstrom and I on Yahoo! for a chat about Buffett, Berkshire and the annual Capitalist Woodstock.