OMAHA, Neb. -- With a line of people snaking around two city blocks as the sun rises in this Midwestern city, a passerby might mistake the mob as parishioners waiting to rush a revival tent.

This first Saturday in May, however, it is over 12,000 shareholders waiting to rush the Omaha Civic Center for the Berkshire Hathaway annual meeting, a chance for disciples of Warren Buffett to catch a glimpse of the world's most celebrated capitalist and, if they're lucky, lob a question to Buffett and Berkshire Vice Chairman Charlie Munger.

For many, the confab is a near-religious experience, with shareholders viewing Buffett as an investing deity -- something he dismisses.

"I think they're smoking something," Buffett joked when asked what he thinks of shareholders who migrate to Omaha because they equate his views on the market to God.

Nonetheless, shareholders have once again packed this hockey-arena-turned-classroom to hear the sage opine and wax eloquently about Berkshire Hathaway ( BRK.A), the markets, his thoughts on corporate governance and life in general. And, of course, to chuckle and respond to the sharp wit and life lessons that Charlie Munger so skillfully provides.

Berkshire, Economy and Taxes

Buffett continues to believe the economy is struggling. "The economy is sluggish, has been for a long time," Buffett noted, reminding investors he opined the economy was in recession in a special letter to shareholders after the tragedies of Sept. 11, 2001. "What has happened is that really since late 2000 housing and autos have done quite well but the rest of the economy has been quite sluggish and it continues."

A weak economy has affected many of Berkhsire's operating business in the first quarter. "Our noninsurance business generally did not do great in the first quarter," Buffett said. "Our insurance businesses did quite well." He noted the company will post about $1.7 billion in operating earnings when the first-quarter report is released, and the insurance business saw its float increase by nearly $1.3 billion, to about $42.5 billion. Of note, the company's troubled General Re unit turned an operating profit in the first quarter.

With the weak economy, Buffett noted the "dramatic decline" in interest rates, saying he didn't think he would see such "low levels" in his lifetime. He hinted there may be more to come. "It the Fed Funds rate might go even lower."

Buffett also opined that the burgeoning budget deficit made current tax-cut proposals untenable. "We are going to spend $2.2 trillion this year; it's just a question of where it comes from," Buffett said. "And, frankly, I don't think enough of it comes from people like me and too much comes from people who work in our shoe factories."

No Fly Zone

Buffett has long had an interest in the aviation business. Not only does Berkshire own one of the leading jet time-share programs in Executive Jet, but he has also dabbled in publicly-traded airlines, including US Airways. However, the near-depression facing the business and the sagging shares of airlines are no longer tempting to Buffett.

"It's an incredibly tough business," Buffett said. "A great management in that business will not necessarily get a great result. There are just some businesses that are just ungodly tough. And what they tend to be is commodity businesses where you are selling a commodity product and where the output is not controlled in any way."

"In the airlines you have a huge amount of capacity, you have what is something close to a commodity product with high fixed costs and no marginal costs," Buffett continued. "That extra seat doesn't cost you anything so the temptation to sell that at a terrible price is overwhelming. It's a basic problem."

However, Buffett continues to think Berkshire's investment in Executive Jet is compelling, suggesting the unit is building market share in a difficult environment. While Executive Jet lost money in the first quarter, Buffett's long-term view keeps him focused in a market he says Berkshire will ultimately "dominate."


With the exception of his stable of insurance companies, energy investments are quickly becoming the major capital focus on Berkshire's investment plan. Berkshire already has $18 billion in energy assets and Buffett said the business "could become huge."

After acquiring MidAmerican Energy nearly three years ago, Buffett has quietly built a formidable stable of assets that support the infrastructure of the domestic natural gas market.

Acquiring the Kern River Pipeline from Williams ( WMB) and Northern Natural Gas pipeline from Dynegy ( DYN), Berkshire now controls over 8% of all natural gas flow in the U.S. And the recent expansion of Kern River to the West Coast meaningfully increases Berkshire's volume.

"Kern River came on with about 900 mm cubic feet of capacity ," Buffett said of the expansion. "We had planned for just 650 million. The demand was for 975 million. The project came in $100 million below budget and we financed well below what we had anticipated financing it for."

With that kind of demand and low cost construction, Buffett sees a business that could grow even further. "If demand is there, which it well could be, it is possible we will expand that in the next couple of years," Buffett said.

When asked whether he would look at other acquisitions in addition to internal expansion, his eyes lit up and he hinted he sees additional energy opportunities. "We're always looking," he said.

In addition, Buffett recently revealed a stake in Petro China, one of the large state-controlled oil and gas exploration and production companies in China. He hinted that the investment was a play on global natural resources and that he might be interested in additional investments in the sector.

When asked about the business and political risks in China, he didn't seem to be terribly concerned. "There will always be problems in the world," Buffett said. "I don't change what we do in business because of what's going on the world."

Buffett and Munger have begun their six-hour question-and-answer marathon. As the dialogue continues, we will continue our updates, including a wrap-up of the days activities later this afternoon. And, for RealMoney subscribers, check for live, up-to-the-minute updates on the Columnist Conversation.