How Warren Buffett Doubled His Money In One Trade
American Express Case Study
Warren Buffett is the best investor of all times.
There are others who performed better than him in their career. But he has been performing at an elite level longer than everybody.
He is in his own league.
He has been outperforming the market by nearly 15% annually for more than 55 years now.
He started by trading cigar butts, special situations, and asset plays. He did these for more than 10 years. He made decent money. But what made Buffett into the mogul we know today wasn’t these small plays.
What created Buffett was his purchase of See’s Candies, Geico, Washington Post, BNSF…
What led him from unknown cigar butts to BNSFs and GEICOs of the world was one trade— American Express.
He would later say:
A cigar butt found on the street that has only one puff left in it may not offer much of a smoke, but the “bargain purchase” will make that puff all profit. Unless you are a liquidator, that kind of approach to buying businesses is foolish. — Warren Buffett
Today, we are going to dive deep into Buffett’s early American Express trade.
This one case study features a legend in his transformational years. It exhibits everything you need to succeed in the market— Simplicity, contrarianism, concentration.
It’ll teach an invaluable lesson:
“The single most important thing to look at in a business is its earning power.”
— Warren Buffett
American Express: Overview
Before we get to the meat, let's understand what American Express was in 1963-1964.
Founded in 1850 as an express mail business, American Express had evolved into a diversified conglomerate of financial services.
The company operated in ten business segments:
Travelers Cheques - The company's largest segment and dominant player with 66% market share
Money Orders - Started in 1880 as competition to the U.S. Postal Service
Utility Bills - Payment processing services
Travel - Selling steamship cruise tickets and organizing international travel
Credit Cards - Launched in 1958, crossing one million members by 1963
Commercial Banking
Foreign Remittances
Freight
Wells Fargo/Hertz
Warehousing - A small, inconsistently profitable segment started in 1944
The Travelers Cheques business was the crown jewel of American Express, offering customers a secure way to travel without cash. They could purchase these cheques and redeem them worldwide at merchants, hotels, and banks. By 1963, this segment had grown from $260 million in 1954 to $470 million, a 6.8% CAGR.
The Credit Card business was showing promising growth. Though it had struggled operationally in its early years, by 1963 it had been profitable for two years running. The card created a two-sided market where American Express could profit from both merchant fees and annual cardholder fees.
In 1963, American Express reported:
Revenue: $100.4 million
Net Income: $11.3 million
Return on Equity: 15.3%
P/E Ratio: Around 26x
The business was a steady compounder. It had grown revenue 11% annually from 1954 to 1963 with a median Return on Equity of 14.8%.
The stock price followed the fundamentals. It had risen consistently through the early 1950s and reached $65 in 1963. It was among the favorites of investors.
Then came the Scandal.
Salad Oil Scandal
It's 1963.
John F. Kennedy was assassinated. The Beatles released their first album. And Anthony "Tino" De Angelis was orchestrating one of the most bizarre financial frauds in history.
De Angelis ran Allied Crude Vegetable Oil, a company that purportedly stored massive amounts of vegetable oil in tanks in Bayonne, New Jersey. The company claimed to have 1.8 billion pounds of vegetable oil in storage, but actually had only about 110 million pounds.
American Express's subsidiary, American Express Field Warehousing Corporation, certified these inventories and issued warehouse receipts that effectively guaranteed their authenticity.
But the oil didn’t exist— How the hell did they pass the inspection?
When inspectors visited the tanks, De Angelis and his team showed them what appeared to be tanks full of valuable vegetable oil. In reality, most contained seawater with just a thin layer of oil floating on top. Other tanks were connected by hidden pipes to create the illusion of multiple full tanks.
It was freaking genius.
The fraud was beyond what many people thought possible.
Difference between claimed and actual oil: about 1.7 billion pounds
Value of the fraud: Approximately $175 million (equivalent to $1.6 billion in today's dollars)
There were multiple warning signs that American Express had missed.
De Angelis had almost been indicted for faking inventories in 1958 in his previous meat business. There were whistleblower calls and compromised inspections. The head of AMEX's warehousing subsidiary, Donald Miller, had convinced CEO Howard Clark to retain Tino's account even when Clark wanted to shut down the warehousing business.
By September 1963, American Express Warehousing had issued receipts worth $87.4 million, essentially guaranteeing this amount. At the time, American Express’ total shareholder equity was just $78.8 million.
Why the hell would they ever guarantee any amount of anything that would exceed their total equity?— We’ll never know.
Here comes the interesting part: De Angelis could have actually built a real business on this.
He got American Express to certify the inventory and he used warehouse receipts as a collateral to borrow money. He could have used this money to buy real inventory and trade. That would have been a legitimate business.
But the thing with fraudsters is that they never stop. They are like gamblers. They don’t know when to lock-in gains and walk away. They think they can deceive everybody forever.
Instead of building a real business, De Angelis used the money he borrowed in commodities trading.— Hardest market to make money, and easiest to lose.
And he lost.
The commodities market started to crash days before the assassination of JFK. De Angelis got one margin call after another. Brokers closed his positions and blocked his accounts. He lost access to all funds required to keep Allied alive.
Allied went bankrupt. Roughly around the same time, American-Express got a whistleblower call, probably from one of the employees Allied let down— “the tanks are empty.”
When inspectors conducted a thorough examination of the tanks at Allied's Bayonne facility, they discovered that the tanks were filled with seawater, instead of salad oil. American-Express was faced with a liability larger than its equity base.
Wall-Street reacted violently and assassination of JFK just added on the panic:
The stock plummeted from $65 to a low of $35 in just weeks.
Market cap declined by approximately $240 million.
P/E ratio compressed from 26x to 14x.
There was one other aggravating factor— American Express wasn’t a corporation.
Before modern corporate law, joint-stock associations founded on the British common law principles didn’t have limited liability. Shareholders could be assigned liabilities exceeding the equity base.
As Buffett later wrote: "There was one other little wrinkle which was terribly interesting. American Express was not a corporation. It then was the only major publicly traded security that was a joint-stock association. As such, the ownership of the company was assessable. If it turned out that the liabilities were greater than the assets, the ownership was assessable. So every Bank department in the United States panicked."
Major owners like Continental Bank (which owned over 5% of the company) began dumping shares. It was a full fledged crisis.
When written in Chinese, the word “crisis” has two components: Wei Ji.
“Wei” means risk while “Ji” means opportunity.
Together, they describe a crisis as a situation that offers both risk and opportunity.
In late 1963, Buffett saw opportunity in crisis.
Buffett Enters The Game
Buffett didn’t buy immediately.
He first did perhaps one of the most legendary scuttlebutts in the history of finance— He went to a restaurant.
He visited different restaurants to observe whether customers were still using their American Express cards. He spoke with bank executives about the usage of American Express cards and checks.
"I went to restaurants all over Omaha, including the most expensive ones, and I'd observe what people did. The scandal didn't cause people to stop using the American Express card. It didn't affect the cardholders, and it didn't affect the merchants." — Warren Buffett
He also hired a stockbroker friend named Brandt to conduct extensive field research.
Brandt interviewed bank tellers, bank officers, restaurants, hotels, and credit card holders, producing a "foot-high" stack of research material. Everything pointed to the same conclusion— It was business as usual.
He reached a fundamental conclusion. Even if American Express had to pay a substantial amount, as much as all its equity base, its earning power was unchanged.
Credit card service establishments had grown impressively from 32,183 in 1957 to 85,580 by 1963.
Travelers cheques and letters of credit outstanding had increased steadily, reaching $470 million in 1963.
Customer deposits and credit balances remained strong at $366 million.
Consumer trust in the brand appeared largely intact despite the scandal.
In April 1964, a Fortune article highlighted that travelers cheques grew 28% in December 1963 compared to the previous year, and credit card billings rose 44% year-over-year for December 1963. The core businesses were thriving— despite the scandal.
Buffett also analyzed the true extent of the liability. American Express CEO Howard Clark had made a crucial statement on November 27th, eight days after Allied declared bankruptcy:
"If our subsidiary should be held liable for amounts in excess of its insurance coverage and other assets, American Express company feels morally bound to do everything it can, consistent with its overall spending responsibilities, to see that such excess liabilities are satisfied." — Howard Clark
Essentially, American Express knew that TRUST was its most valuable asset and would go out of its way to keep it intact. This meant that it could pay beyond the $87.4 million it initially guaranteed.
It could, not that it had to.
Liability might not exceed $87.4 million, it could have been way smaller, but especially after JFK’s assassination, everybody inclined to think the worst.
By April 1964, it became increasingly clear that the ceiling on potential liabilities was around $35 million (50% of American Express's equity), not the $150+ million (nearly 2x equity) initially feared. A Forbes article detailed how the original liability estimate was not realistic and concluded that the after-tax figure was between $10-35 million.
Buffett also conducted his own valuation. He was looking at:
Stock price: $40/share
Market Cap: $178.4 million
Enterprise Value: $124.1 million
EV/EBIT (1963): 7.8x
Business was now trading at 15.8 times earnings against SP 500 average of 18.9 times for the time being.
He relied on two assumptions— 1) Equity wouldn’t be completely wiped out, 2) Business would keep growing earnings ~10% annually for the next 5 years.
He figured out that by 1969, earnings per share would reach $4 and a P/E of 18 would result in $72 per share. Discounting it back at 10%, he figured that the fair value should have been around $45.
That was a conservative scenario. Every bit of multiple expansion beyond that would be extra.
It just made sense.
Armed with these insights, Buffett began accumulating shares in early 1964.
He started buying when the price was around $35 per share and he scaled the position quickly. His average purchase price was around $40 per share.
By mid-1964, Buffett had invested approximately $13 million— which represented about 5% of American Express's outstanding shares and a staggering 40% of his partnership's total assets.
He was unusually concentrated on this position. He had been experimenting with putting bigger bets on situations he was confident for a while now and he saw that these bets accounted for most of the returns of the partnership.
He had derived a new philosophy— “Diversification is protection against ignorance. It makes little sense if you know what you are doing.”
He knew what he was doing. American Express’ earning power was intact and the stock would have to follow growing earnings, eventually.
Recovery
American Express swiftly responded to the crisis.
Six weeks after Allied's bankruptcy filing, they had already organized the first formal creditors' meeting. The company outlined a settlement proposal by April 1964— $35 million initial payment, additional $10 million in installments and $5 million from liquidating the inventory that actually existed.
Negotiations went on for a while. American Express eventually agreed to pay $60 million in total. Though this was near 75% of its equity base, it was much less than feared.
The company was able to finance this through a combination of loss reserves, insurance recoveries, and additional debt. American Express didn't need to issue equity, which would have diluted existing shareholders. This preserved the company's earnings power on a per-share basis.
As the claims settled, the stock rapidly recovered. By late 1964, the stock had recovered to the mid-$50s range. By 1965, it had fully recovered to pre-scandal levels around $65.
By mid-1966, it reached $80 levels.
He doubled his money in two years without assuming outsized risk. He started liquidating his position in late 1966 and early 1967.
Though he exited most of the position by mid-1967, he learnt invaluable lessons that would define his investing style for decades to come.— Buy quality at fair fair prices.
Lessons Learned
Earlier in his career, Buffett had primarily followed Benjamin Graham's strict statistical approach – buying companies trading below their net current asset value, regardless of the quality of the underlying business. These "cigar butt" investments, as he later called them, might have one good puff left in them before being discarded.
In 1963, just before the AmEx investment, Buffett's portfolio still contained numerous cigar butts:
Dempster Mill Manufacturing (farm equipment company bought below NCAV)
Berkshire Hathaway (textile manufacturer bought at 2/3 of book value)
Cleveland Worsted Mills (textile company in liquidation)
American Express was something different.
It was a high-quality business facing a temporary problem. Buffett was beginning to understand the extraordinary value of companies with durable competitive advantages – what he would later call "wonderful companies."
I assume he later reflected on this investment and tried to understand what made American Express different.
I don’t think he made the right assumptions about the characteristics of the business. He was right to assume that the business could increase earnings 10% annually in the near future. I think he just assumed that nothing fundamental changed in the business.
But I think he would say that this growth rate should decline to single digits after 4-5 years. Yet, we are still expecting +10% annual earnings growth for American Express today, 60 years later…
Buffett should have seen it next decades and I think that was when he really understood the characteristics of the business. He initially saw two things:
American Express had consistently high return on equity.
It was a capital light business.
Thus, in the lack of maintenance capex, most money would be invested in growth, resulting in higher earnings.
Still there is a missing piece here— what made this business grow with very little reinvestment?
I think See’s Candy acquisition was informative here.
I assume he totally absorbed it when he saw that See’s wasn’t losing many customers despite his bumping prices 10% annually. That was free growth.
He must have later thought that American Express’ model is even better than See’s. Because what allows See’s to bump up prices is its brand value.
For American Express it works a bit differently. It doesn’t bump up prices.
Instead, businesses accepting American Express do it for Amex. When they bump up prices, American Express’ earnings also grow because it cuts a commission on the basket total.
On the other hand, American Express’ brand value also attracts wealthy users who don’t cut their spending when faced with increasing prices.
You have the perfect business.
Its member locations bump up prices and its brand value attracts customers who are able to pay increasing prices. Its commissions increase and so does its earnings.
He calls such businesses “toll bridges.”
He apparently learned two lessons:
Pricing power is the key to reliable long-term growth.
Such strong businesses can be bought at bargain prices in times of temporary problems.
He followed this playbook many times later on:
He bought Coca-Cola in 1987 after a market crash.
He entered Bank of America and Wells Fargo after the 2008 crisis.
He bought Apple amidst the 2016 mini recession.
These lessons apply today equally strongly as they did in the past.
We bought a big chunk of American Express stock back in early 2023 when the stock was trading at 14 times forward earnings. This position doubled in the next 12 months.
It’s a golden goose that keeps giving.
I know there are many similar opportunities that exist today.
All you need to exploit them is a sharp eye, contrarian mind and independent judgment.
And I know, American Express, for one reason or another, will experience such a drawdown again in future. When it happens, we will be there again.
It paid off for us in the same way 60 years after Buffett, and I know it’ll pay off again unless we live in a wildly different world where we don’t use money anymore.
Until then, we will dance when we hear the music!
Great post Oguz; one of the best takes I've read on the AMEX situation. Thanks for sharing.
Great article on Warren Buffett in action, including his investment thought process—a good lesson for all of us investors. Buffett, in his investment actions, always reminds me of Kipling's poem "If.": "If you can keep your head when all about you are losing theirs..."