Sydney -- Commentators had wondered if the sluggish US economy, rising petrol and air fares, would cut the number of people trekking to Omaha in Nebraska at the weekend for the Annual Meeting of Warren Buffett's Berkshire Hathaway company.

Some 27,000 visited the Midwest city a year ago for the so-called "Woodstock Festival of Capitalism" as the Berkshire AGM has become known.

There was the usual video, which sent him up as well as politics and the presidential candidates. He swapped roles with a TV soap opera charge who is in jail in her series for insider trading and he and Berkshire Vice Chairman Charlie Munger took questions for five hours on investing, the economy, politics and life.

Reports said it was the biggest meeting so far for the legendary investor and his band of devoted shareholders.

A record 31,000 shareholders turned up for the AGM and two days of festivities. If all company AGMs were as successful around the world, there would be fewer problems with shareholder-board relations.

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He had bad news before the meeting: a big drop in first quarter earnings (See below) from lower insurance returns and paper losses on credit derivatives (not on subprime mortgages though).

And it looks, from the results in insurance and his forecast in the letter to shareholders in February, that returns from this area, will be weak over the rest of 2008. Insurance is the company's major activity.

According to CNNmoney he had an interesting take for investors: he and partner Charlie Munger told them to think small and not get too greedy for big returns

"In the Q&A session Saturday morning at Berkshire Hathaway's annual meeting, CEO Warren Buffett and vice chairman Charlie Munger repeatedly warned investors to lower their expectations. When a shareholder asked whether Buffett's recent purchases of publicly traded stocks were likely to generate returns greater than 7% to 10% over time, Buffett promptly said no."

He said that the Federal Reserve had avoided financial market "chaos" in coordinating the March bailout of Bear Stearns, which was facing certain bankruptcy before agreeing to be acquired by JPMorgan Chase, with the Fed's backing. That was a comment he made on Bloomberg the day before (see below).

"I think the Fed did the right thing in stepping in on Bear Stearns. Just imagine the thousands of counterparties around the world having to undo contracts."

Buffett said the Bear Stearns near collapse and rescue illustrates how some investment banks and commercial banks may have grown too large to effectively manage risk.

"The big investment banks, a number of them, and big commercial banks, I think they're almost too big to manage effectively from a risk standpoint in the way they've elected to conduct their business.

"We want to run Berkshire where if the world isn't working tomorrow the way it is working today, or in a way that wasn't expected, we wouldn't have a problem. If we can earn a decent return on capital, what's an extra percentage point?"

Berkshire has benefited from the recent market disruptions, including many triggered by the subprime problems and the housing crisis.

He said the company's four-month-old bond insurer, Berkshire Hathaway Assurance Corp, wrote $US400 million in business in the first quarter, more perhaps than other rivals combined. It was taking business from the opposition insuring corporate and other bonds, and charging up to double the premium that existing (and struggling) insurers were offering.

Berkshire also bought $US4 billion of so-called "auction-rate" municipal debt when yields soared into double digits when the market shut down earlier in the year during the credit crunch. These bonds are sold by higher rated states, cities and other groups and some couldn't get set for weeks with offerings and ended up paying well over 10%, double and triple what they were paying previously.

Buffett plans this month to visit four European countries to seek out family-owned businesses he might want to buy when the time comes for a sale. He said Berkshire isn't on the "radar screen" of many potential sellers in Europe.

On the eve of its annual meeting in Omaha at the weekend, Warren Buffett's Berkshire Hathaway said on Friday that first-quarter profit dropped 64% as falling rates cut returns from its huge insurance operations.

The company reported $US991 million in investment losses as it marked down the value of derivative contracts.

It said net profit dropped to $US940 million, from $US2.6 billion, in the first three months of 2007.

The company said that the profit from underwriting insurance policies fell 70% to $181 million in the quarter (see, Insurance Australia Group isn't the only insurer with problems). Pre-tax underwriting profit at Berkshire Hathaway Reinsurance Group, which sells catastrophe coverage, dropped 95 percent to $US29 million.

Berkshire's investment loss compared with a profit of $US382 million a year earlier as the company recorded $US1.7 billion of unrealized losses from contracts that protect fixed-income investors and from options sold on the value of the Standard & Poor's 500 Index and three other stock indexes.

These were losses forced on the company by accounting regulations on 'fair value' as companies have to write down (or write up) assets like derivatives, bonds and forex contracts to 'fair value' each quarter. Berkshire seems to have been hit by the turmoil in March in the wake of the rescue of Bear Stearns on March 17.

Given the way markets settled down in April, it's likely the value of the same assets could have risen.

Geico, the big car insurer, saw its profit fall 37% to $US186 million before taxes on rising claims costs. Soft premium rates also contributed to the lower returns and Geico's insurance margin fell to 6.1c in the dollar (of premium income) compared to 10.3c in the same period a year earlier.

The softer returns were forecast by Buffett in his annual letter to shareholders in February: "It is a certainty that insurance industry profit margins, including ours, will fall significantly in 2008".

Berkshire last week invested $US6.5 billion to help finance Mars' takeover of the Wrigley company, the world's biggest maker of chewing gum.

In February Berkshire revealed it became the largest shareholder in Kraft Foods, the world's second largest food maker. The Mars deal has raised speculation that Kraft might become involved in some corporate activity.

The loss on the derivative contracts though, has a certain irony in that they are an investment class he once described as "financial weapons of mass destruction".

In a statement, Mr Buffett blamed the fall in profits on accounting rules that force companies to mark down unrealised gains or losses on derivatives.

Quoting an excerpt from Berkshire's annual report, Mr Buffett said he and his long-term associate Charlie Munger were not "bothered by these swings even though they could easily amount to $1b billion or more in a quarter and we hope you won't be either".

The company recorded a $US1.2 billion unrealised loss on put contracts on the S&P 500 index and three other indexes.

Under these contracts, Berkshire will have to pay investors between 2019 and 2028 if indexes are below a pre-determined level. The recent decline in world stock markets forced it to take an accounting loss on the contracts.

Berkshire also took a $US490 million loss on credit default swaps that protect investors against the default of high-yield bonds. The derivatives losses were offset by profits elsewhere, leaving Berkshire with an investment loss of $US991 million in the quarter.

That was a paper loss, the lower returns from the insurance business were real, as were lower returns from some of its industrial operations.

And before the AGM he told Bloomberg that the global credit crunch has eased for bankers and the Federal Reserve probably averted more failures by helping to rescue Bear Stearns.

"The worst of the crisis in Wall Street is over," Buffett said. "In terms of people with individual mortgages there's a lot of pain left to come."

Buffett told Bloomberg that the Fed acted properly when it arranged a $US2.4 billion bailout of New York-based Bear Stearns by JP Morgan.

He said he turned down the opportunity because he lacked enough capital and time to grasp the situation and that more failures and wider panic may have resulted if the regulators didn't halt the run on Bear Stearns.

"The worry was that there would be contagion; it was a very real worry. If Bear Stearns had gone, the next day somebody else would have gone. It could've been a very, very, very chaotic situation."

Buffett said on Bloomberg TV that he was contacted about Bear Stearns in March before JPMorgan agreed to buy Bear Stearns.

"As I understand it, Bear Stearns had $US65 billion due on Monday and I didn't have $US65 billion. I couldn't get my mind around that situation in the required time."

According to the first quarter report on Friday Berkshire had around $US35 billion in cash on hand (which is essentially the 'float'; from its insurance businesses and left over liquid funds).

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