Buffett's Investment: American Express Company

American Express is one of the most remarkable investments in Warren Buffett’s career because it demonstrates his ability to identify long-term value during periods of crisis and uncertainty. This was not Buffett’s first investment in American Express. He had already invested heavily in the company during the 1960s while managing the Buffett Partnership. The earlier investment became famous because Buffett invested a significant portion of his partnership’s capital when American Express was struggling due to the Salad Oil Scandal. Decades later, Buffett once again recognized the strength of American Express and added it to Berkshire Hathaway’s portfolio. This investment perfectly represents Buffett’s philosophy of investing in strong businesses when temporary problems create attractive opportunities. The Background of American Express Investment During the 1960s, American Express faced a major crisis because of a financial fraud involving a company that used fake salad oil inventory to obtain loans from banks. American Express had provided loans connected to this fraudulent activity, and when the fraud was discovered, the company faced significant losses. Investor confidence collapsed, and the stock price fell dramatically. Many investors believed American Express had suffered permanent damage. However, Buffett approached the situation differently. Instead of focusing only on the accounting loss, he studied whether customers had lost trust in the company. He analyzed important parts of the business, including credit card transactions and traveler’s cheque activity. Buffett discovered that customers were still using American Express products. The company’s reputation and customer relationships remained strong despite the temporary crisis. This gave Buffett confidence that the market reaction was excessive. He invested approximately 40% of the Buffett Partnership’s assets into American Express. Within a few years, the stock price recovered significantly, creating enormous returns for Buffett and his investors. Consistent Operating History When Buffett invested in American Express again through Berkshire Hathaway, he appreciated the company’s long operating history. Although American Express was known as a financial company, its business was much broader than traditional banking. Only a small portion of its revenue came from banking activities. A major part of its business came from traveler’s cheques, payment services, financial products, and other consumer-focused services. The company had built a strong reputation over many years. Its brand name represented trust, reliability, and convenience. Buffett understood that strong brands create powerful advantages because customers often continue choosing companies they trust even when competitors offer similar services. Rationality Buffett pays close attention to whether management makes decisions that improve shareholder value. During the 1990s, Harvey Golub became the CEO of American Express and focused on restructuring the company. Instead of maintaining businesses that were not generating attractive returns, Golub began selling weaker divisions and concentrating on the company’s strongest areas. His goal was to improve efficiency, increase profitability, and create a stronger business structure. The company established clear financial targets, including annual earnings growth of around 12% to 15% and return on equity targets between 18% and 20%. After restructuring, American Express also began share buyback programs. These actions demonstrated disciplined capital allocation. By 1995, Berkshire Hathaway had accumulated approximately 10% ownership in American Express. Determining the Value Buffett’s investment decisions always depend on estimating the true value of a company. For American Express, Buffett considered the company’s future growth potential and used discounted cash flow analysis. Based on management’s expectations and reasonable growth assumptions, analysts estimated future earnings growth of approximately 10% annually for the next decade and around 5% afterward. Using an 8% discount rate based on long-term U.S. Treasury yields, the estimated intrinsic value of American Express was calculated at around $100 per share. Buffett purchased shares at a price significantly below this estimated value. This created a strong margin of safety. The investment opportunity existed because the market had underestimated the company’s ability to recover and grow. The Importance of Brand Strength American Express highlights one of Buffett’s most important investment lessons: intangible assets can create enormous value. A company’s brand reputation, customer loyalty, and trust are often not fully reflected on financial statements. Traditional accounting methods may not assign a clear value to these assets, but they can determine the long-term success of a business. American Express had built a powerful brand over decades. Customers trusted the company with their financial transactions, and businesses accepted American Express because of its reputation. This created a competitive advantage that was difficult for competitors to copy. The Lesson from American Express The American Express investment demonstrates Buffett’s ability to separate temporary problems from permanent business damage. Many investors avoided the company because they focused on the crisis. Buffett focused on the strength of the underlying business. He understood that a strong company with a valuable brand could recover from temporary setbacks. The investment also highlights an important principle of value investing: A falling stock price does not always mean a failing business. Sometimes, the market creates opportunities by reacting emotionally to short-term problems. Successful investors look beyond fear and analyze whether the company’s long-term value remains intact. American Express became one of Buffett’s most successful investments and remains an excellent example of his ability to identify quality businesses during difficult times.