The American Express Odyssey

The year was 1963, and American Express was facing what seemed like an existential threat. The company had guaranteed millions of dollars worth of vegetable oil that turned out to be nothing more than seawater in disguise. This "salad oil scandal" sent American Express stock plummeting, wiping out more than 50% of its market value in mere days.

As panic gripped Wall Street, Buffett saw an opportunity where others saw only disaster. His analysis went far beyond the immediate crisis. Buffett delved deep into American Express's fundamentals, studying its business model, competitive advantages, and long-term prospects.

What Buffett discovered was a company with an unassailable moat—a term he uses to describe a business's ability to maintain competitive advantages over its rivals. American Express possessed a powerful brand, a vast network of merchants, and millions of loyal cardholders. These assets, Buffett reasoned, were far more valuable than the temporary setback of the salad oil scandal.

Buffett's decision-making process was methodical. He calculated that even if American Express had to pay out the full $150 million liability from the scandal, it would only amount to about three years' worth of the company's normal earnings. This was a significant hit, but not a fatal one for a business with American Express's earning power and brand strength.

Moreover, Buffett recognized that the crisis was actually strengthening American Express's competitive position. Many merchants were rallying around the company, seeing its traveler's checks and credit cards as essential to their businesses. This display of loyalty convinced Buffett that American Express's moat was not only intact but potentially widening.

Armed with this conviction, Buffett made a bold move. He invested a staggering 40% of his partnership's assets—about $13 million—into American Express stock. This concentration flew in the face of conventional wisdom about diversification, but Buffett's deep analysis gave him the confidence to make such a large bet.

The immediate aftermath was nerve-wracking. The stock continued to fluctuate, and many questioned Buffett's judgment. But Buffett wasn't focused on the day-to-day price movements. He was looking a decade ahead, envisioning what American Express could become once it weathered the current storm.

Buffett's patience and foresight paid off spectacularly. By 1965, American Express had resolved the salad oil case, and its stock price had recovered. But Buffett didn't sell. He understood that the real value of his investment would be realized over many years, even decades.

In the following years, American Express expanded globally, diversified its services, and solidified its position as a premier financial brand. Buffett continued to hold and even increase his stake, demonstrating his willingness to own the stock not just for 10 years, but for over 50.

The numbers tell a staggering story of long-term value creation. Buffett's initial $13 million investment has grown to be worth over $25 billion today. Berkshire Hathaway now owns about 19% of American Express, and the dividends alone from this investment exceed $300 million annually—more than 20 times the original purchase price.

But the American Express saga isn't just about the eye-popping returns. It's a testament to the power of Buffett's long-term thinking and his ability to see beyond immediate crises. While others were frantically selling, Buffett was calmly buying, confident in his analysis of American Express's enduring value.

This approach embodies several key aspects of Buffett's investment philosophy:

1. Focus on the business, not the stock price: Buffett's decision was based on his understanding of American Express's fundamental value, not short-term market fluctuations.

2. Look for durable competitive advantages: The strength of American Express's brand and network was central to Buffett's thesis.

3. Be greedy when others are fearful: The crisis created a buying opportunity that Buffett was prepared to seize.

4. Think in decades, not quarters: Buffett's willingness to hold for the long term allowed him to capture the full value of American Express's growth.

5. Concentrate on your best ideas: Buffett's large position in American Express reflected his conviction in the investment.

The American Express investment illustrates why Buffett advises being willing to hold a stock for at least 10 years. It's not about blind buy-and-hold investing, but about having the foresight to recognize great businesses and the patience to let them compound value over time.

In essence, Buffett's American Express odyssey is a powerful reminder that in investing, it's not about timing the market or making quick profits. It's about identifying exceptional businesses, buying them at reasonable prices, and having the discipline to hold them through thick and thin. Because in the world of investing, true wealth is created not in minutes or months, but over years and decades.