Warren Buffett and Charlie Munger were 'sidelined in fear' during the coronavirus crash, investor Bill Smead says

• Warren Buffett and Charlie Munger were too terrified during the coronavirus crash to make any big moves, Berkshire Hathaway investor Bill Smead said in his second-quarter shareholder letter.
• "It is unlikely they have been more scared by economic circumstances in my lifetime than they were in March through May," Smead Capital Management's portfolio manager said.
• Buffett's efforts to give positive advice "only stretched to mindlessly investing into the S&P 500 index," he added.
• Smead and his team reacted to the outbreak by targeting hard-hit stocks such as Chevron and Simon Properties, and benefited from stronger demand at Target, Home Depot, and eBay.
• Visit Business Insider's homepage for more stories.

Berkshire Hathaway's CEO and vice chairman failed to capitalize on the coronavirus crash because they were too afraid, longtime investor Bill Smead wrote in his second-quarter shareholder letter this week.

"We are huge fans of Warren Buffett and Charlie Munger, but it is unlikely they have been more scared by economic circumstances in my lifetime than they were in March through May," Smead Capital Management's portfolio manager said.

The "most brilliant value investors of all time" were "sidelined in fear and trapped out by size considerations," Smead continued, referring to the pair's challenge in finding deals that can move the needle at a $450 billion conglomerate.

Buffett tried to sound positive at Berkshire's annual meeting, but his advice to investors "only stretched to mindlessly investing into the S&P 500 index," Smead added.

Smead's co-manager, Tony Scherrer, made a similar criticism in May after Buffett recommended the benchmark index and said it was "the best thing" for most people.

Scherrer argued the Berkshire chief was effectively endorsing big tech companies as their shares are the most heavily weighted in the S&P 500, undermining his past warnings about "gruesome" companies that grow quickly but require lots of capital to keep expanding and generate little or no profit.

"Their ability to suck up capital at the margin might even give the dotcom bubble disaster a run for its money," Smead said in his letter this week.

Running into the fire

The market rebound was spearheaded by fast-growing companies such as Amazon, Tesla, and Zoom Video while Berkshire and other more traditional businesses treaded water.

"Value investments reached epic underperformance levels versus the index and especially to growth stocks," Smead said.

Against that backdrop, Smead and his team focused on "opportunities in hell" — stocks with smaller market caps that traded at bargain prices but operated in highly challenged industries.

"We began tacking our portfolio toward companies at the epicenter of COVID-19 fears and in the middle of the burning flames," he said.

For example, they sold their Occidental Petroleum stake and bought Chevron stock, and also invested in mall-owner Simon Properties.

Some of their existing holdings benefited from the pandemic too. Target, Home Depot, and eBay all saw higher demand as consumers snapped up essentials and home-improvement products and bought more items online.

However, Smead's flagship value fund still fell about 17% in the six months to June 30, trailing the S&P 500's 3% decline over the same period.