How Warren Buffett's Early Investment in American Express Showcased the Power of Compound Interest

In 1964, American Express was reeling from the infamous "salad oil scandal." A commodities trader had fraudulently borrowed millions using soybean oil as collateral - oil that turned out to be mostly water. American Express, which had guaranteed the inventory, was on the hook for millions and its stock plummeted.

While others saw disaster, Buffett saw opportunity. He understood something fundamental about American Express – and about investing. He saw not just a financial services company in trouble, but a brand with unparalleled recognition and a product with remarkably stable demand. More importantly, he recognized a perfect vehicle for harnessing the power of compound interest.

Buffett invested $13 million in American Express, acquiring a 5% stake in the company. At the time, this move raised eyebrows. American Express was facing potential bankruptcy, and some wondered if the young investor had lost his touch.

But Buffett understood Einstein's wisdom. He didn't just buy American Express stock; he let it compound. He reinvested dividends, allowing his stake to grow not just through stock appreciation, but through the magical effect of compounding.

Think of it like a snowball rolling down a hill. At first, the growth seems slow and unremarkable. But as the snowball picks up more snow, it grows larger, which in turn allows it to pick up even more snow. The process accelerates, and before you know it, you've got an avalanche.

That's exactly what happened with Buffett's American Express investment. By 2023, that initial $13 million stake had grown to over $22 billion. That's not just growth; that's compounding in action.

But here's the kicker – Buffett didn't achieve this through complex financial engineering or by constantly buying and selling. He simply bought a great company at a fair price and then did the hardest thing in investing: nothing. He let compound interest work its magic.

This strategy embodies the second part of Einstein's quote: "He who understands it, earns it. He who doesn't, pays it." Buffett understood that by reinvesting dividends and allowing his investment to compound over decades, he could achieve returns that seem almost magical to the uninitiated.

On the flip side, consider those who don't understand compound interest. They're the ones taking out high-interest loans, carrying credit card balances, or simply keeping their money in low-yield savings accounts. They're paying compound interest rather than earning it.

The American Express case teaches us that compound interest isn't just a mathematical curiosity – it's a powerful force that can work for or against you. It's the difference between building wealth and struggling financially.

So, what's the takeaway for the average investor? It's simple: start early, invest in quality, and have patience. You might not have Buffett's resources, but you have the same powerful ally he does – time. Whether you're investing in index funds, dividend-paying stocks, or your 401(k), remember that you're not just saving money. You're planting seeds that, with patience and understanding, can grow into a mighty oak of wealth.

Buffett's American Express investment isn't just a success story – it's a testament to the awesome power of compound interest. It's a reminder that in the world of investing, sometimes the best action is inaction, and the most powerful force is the one that works silently in the background, turning small investments into fortunes.