Warren Buffett’s Investment in American Express: A Case Study in Conviction Investing

• First Investment (Buffett Partnership):

  • Year: 1964

  • Investment Amount: $13 million (~40% of Buffett’s partnership)

  • Average Purchase Price: ~$40 per share

  • Return in 2.5 Years: 124%

• Later Investments (Berkshire Hathaway):

  • Total Investment: $8.43 billion

  • Average Purchase Price: $55.5 per share

  • Current Value: $48.8 billion

  • Total Return: 480%

  • Ownership in American Express: 22.18%

Buffett built his American Express position in two phases:

1. In 1964, as a contrarian investment during the Salad Oil Scandal with his Buffett Partnership.

2. Since 1998, through Berkshire Hathaway as a long-term, high-growth holding.

This remains one of Buffett’s most legendary investments, proving the power of brand loyalty, pricing power, and long-term compounding.

The Famous “Salad Oil Scandal” and Buffett’s Contrarian Bet

Background: The 1963 Crisis That Shook American Express

In 1963, American Express became entangled in the Salad Oil Scandal, one of the biggest corporate frauds of the time. Tino DeAngelis, a businessman with a history of fraudulent activities, had faked warehouse receipts for massive quantities of soybean oil.

• American Express’s subsidiary (AEFW) guaranteed warehouse receipts for soybean oil that didn’t actually exist.

• When the fraud was uncovered, American Express faced claims of $135 million—a huge sum relative to its $78 million in shareholders’ equity​.

• Investors panicked, fearing the company would go bankrupt.

• The stock price dropped from $61.81 to $35.31, a 43% decline in just a few months​.

Buffett’s Unique Approach: "Scuttlebutt" Investing

Unlike Wall Street, which focused on the financial damage, Buffett analyzed the brand’s strength. He personally visited restaurants, hotels, and banks to see whether consumers had stopped using American Express credit cards and traveler’s cheques.

• Finding: There was no significant drop in usage. Despite the scandal, consumers still trusted American Express​.

• Decision: Buffett invested nearly 40% of his partnership’s capital ($13 million) into American Express, making it his largest position at the time​.

The Outcome: Massive Gains in Just Two Years

• Buffett bought American Express shares at an average of $41.22 per share in 1964.

• By 1967, the stock had more than doubled to $92.50, a 124% gain in two and a half years.

• The broader market (Dow Jones) declined by 6% during the same period​.

Buffett’s Lesson: "Be greedy when others are fearful." The scandal was temporary, but American Express’s brand was permanent.

Why Buffett Continued to Hold American Express for 60+ Years

1) The Power of Brand and Trust

American Express is one of the strongest financial brands in the world, commanding loyalty from high-net-worth customers.

• Even after the Salad Oil Scandal, customers didn’t abandon the brand.

• Buffett believed that trust in a financial services company is its most valuable asset​.

2) Pricing Power and a Durable Business Model

Buffett loves companies with pricing power, and American Express fits this perfectly:

• Membership Fees: Unlike Visa and Mastercard, American Express earns revenue not just from transaction fees but also from annual membership fees.

• Merchant Discount Fees: American Express charges merchants higher transaction fees (discount rates) than Visa/Mastercard because of its affluent customer base.

• Premium Credit Card Business: Unlike mass-market cards, AXP focuses on premium customers, who are less sensitive to fees​.

3) A Cash Flow Machine with High Returns on Capital

• American Express generates massive free cash flow and requires little reinvestment.

• Buffett prefers businesses that don’t require heavy capital expenditures, allowing more cash to be returned to shareholders or reinvested into other businesses​.

• Since acquiring his stake, American Express has repurchased shares aggressively, increasing Buffett’s ownership stake to 22.18% without him needing to buy more shares​.

4) A Compounding Investment That Funds Berkshire’s Other Deals

• Like See’s Candies, American Express has been a cash-generating investment that allowed Berkshire to fund other acquisitions.

• Buffett has said that the long-term compounding effect of quality businesses like AXP is far greater than frequently switching investments​.

Lessons from Buffett’s Investment in American Express

1) Buy When Others Panic, But Only in Strong Businesses

Buffett bought AXP when investors panicked about the Salad Oil Scandal, but only because the core business and brand remained strong.

2) The Importance of Brand and Trust in Financial Services

For financial companies, trust is everything. Even in crises, AXP’s customers stayed loyal, which protected its long-term value.

3) Compounding Takes Time—Hold Great Companies for Decades

Buffett’s patience allowed his initial investment to grow into one of Berkshire’s largest holdings. The compounding effect of high returns on capital + share buybacks made AXP an extraordinary investment.

4) Pricing Power Is a Key Indicator of a Great Business

American Express’s ability to charge higher fees than competitors and still retain customers is a sign of a durable competitive advantage.

Conclusion: Buffett’s Perfect Long-Term Investment

Buffett’s investment in American Express showcases his evolution as an investor. What began as a contrarian bet in 1964 turned into one of Berkshire Hathaway’s largest and most profitable holdings.

He identified the strength of the AXP brand during a crisis, held on for decades, and benefited from compounding returns, share buybacks, and pricing power.

Key Takeaway: Buying high-quality businesses during moments of fear, and holding them for decades, can lead to extraordinary investment returns.

The information is provided for educational purposes only and does not constitute financial advice or recommendation and should not be considered as such. Do your own research.