American Express

1. Origin of Relationship: The 1963-1964 Salad Oil Scandal

Berkshire's relationship with American Express begins during the Buffett Partnership era. In November 1963, American Express was struck by the Salad Oil Scandal (orchestrated by Tony De Angelis of Allied Crude Vegetable Oil). De Angelis had obtained massive warehouse loans from Amex by using oil storage tanks filled almost entirely with water, with only a thin layer of salad oil floating on top to trick inspectors.

When the fraud collapsed, American Express faced sudden liabilities of approximately $150 million, completely wiping out its capital and causing its stock price to drop by more than 50%.

Buffett's "Scuttlebutt" Research

Rather than relying purely on balance sheets, Warren Buffett conducted field research to test if the company's core brand was broken:

• He stood behind the cash register at Ross's Steak House in Omaha and saw that customers were still using their green American Express cards to pay for meals.
• He visited local banks and travel offices and observed that travelers were still purchasing and using Amex Traveler's Checks as cash.
• He went to supermarkets and verified that merchant acceptance was completely unaffected.

Recognizing that the core Consumer Franchise (its moat) remained fully intact despite a "localized excisable cancer" at the parent corporation level, Buffett allocated 40% of the Buffett Partnership's entire capital ($13 million) to buy American Express shares at their absolute bottom. It became one of the most successful trades of his early career.

2. Major Milestones

• 1980: In his shareholder letter, Buffett compared GEICO's 1976 turnaround to Amex in 1964: "Both were one-of-a-kind companies, temporarily reeling from the effects of a fiscal blow that did not destroy their exceptional underlying economics."
• 1991: Berkshire purchased $300 million of American Express Percs (Preferred Equity Redemption Cumulative Stock) in a private placement.
• 1994: The Percs were due to convert into common stock. Despite facing relentless competition from Visa, Buffett decided not to sell the stock after a golf game with Frank Olson (CEO of Hertz), who convinced him of the immense power of the Amex corporate card franchise.
• 1997: The American Express shares surged, resulting in a $3 billion unrealized gain on the original $300 million investment, driven by the outstanding management of CEO Harvey Golub.

3. Strategic Importance

American Express represents one of Berkshire's "Big Four" structural equity holdings. It exemplifies a powerful consumer and corporate franchise with an entrenched competitive moat. The 1994 decision to hold the stock rather than sell the converted Percs highlights Buffett's reliance on "scuttlebutt" (information from business operators like Frank Olson) and his willingness to hold wonderful businesses indefinitely.

🔗 Connections

• Company / People: Warren Buffett, Harvey Golub, Frank Olson
• Concepts: Consumer Franchise, Convertible Preferred Stock, The Moat
• Sources: 1964 Portfolio Analysis, 1980 Letter, 1994 Letter, 1997 Letter, 2004 Letter, 2011 Letter, 2020 Letter, 2022 Letter, 2023 Letter

---