Looking Back at Warren Buffett and American Express in 1962
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One of Warren Buffett (Trades, Portfolio)'s most successful early trades was American Express Co. (NYSE:AXP) back in 1962.
The young investor decided to take advantage of the company's distressed share price following the Salad Oil Scandal.
Great opportunity
Explaining this trade to students at the University of Notre Dame in a series of lectures in the spring of 1991, the CEO of Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) noted that, at the time, American Express had a field warehousing company that was a tiny little subsidiary with $12 million in capital.
The subsidiary's job was to certify that inventories really existed before owners could then borrow against the certification the business issued. A fraudster named Tino De Angelis decided to try and take advantage of the process by filling tanks with water and then a thin layer of salad oil. American Express fell for it and, as Buffett explained in 1991, "at one time, they were authenticating the existence of more salad oil than the Department of Agriculture, in its monthly reports, was saying existed in the United States."
Eventually, in 1962, the scam blew up and several companies went bankrupt as a result. "All of a sudden, they've got this little subsidiary, not the parent company, but the subsidiary, that was on the hook for tens and tens of millions of dollars, and nobody knows how much," Buffett said.
This was a problem not just for American Express, but for all of its owners as well. As Buffett went on to explain:
Seeking value
Despite these issues, Buffett could see value in the stock. He was particularly interested in the company's credit card and travelers checks business, which was untouched by the salad oil scandal.