Warren Buffett is one of the most famous and richest investors of all time. He has amassed a fortune of over $80 billion and has held the position of the third richest person on the planet. In 1964,Buffett invested inthe financial services company American Express. The Oracle of Omaha’s purchase of this company would forever change his views on investing.
Beforehe had invested in Amex, Warren was famous for buying bad companies at cheapprices. He would make a profit since the company’s stock was way cheaper thanwhat it was actually worth.
Yet,this would all change when he met his lifelong friend and business partner,Charlie Munger. In 1959 the two would officially meet and since then theirlives would never be the same.
CharlieMunger realized that Warren could make a lot more money if he started using adifferent investment strategy. Munger would advise him to spend more timeinvesting in great companies at fair prices, instead of abysmal companies atcheap prices.
1. American Express Had a Solid Competitive Advantage
Thecore of American Express’s success comes from the company’s business model andits famous branding. Warren Buffett has a good eye for these things, heunderstood how these characteristics could help create a loyal customer base.Loyal customers that would help increase American Express’s sales figures foryears to come.
The American Express Brand
Inthe early 1960s, American Express was competing with Diners Club Internationalthrough their sales of credit cards. Diners Club is famously known to haveissued the first international credit card in history in the 1950s. However,their brand was simple, having their cards made of cardboard instead ofplastic.
WhenAmerican Express started selling credit cards, they looked more like a symbolof status. Their sleek plastic design and appealing logo of a Roman guard madeconsumers feel like they were special. For this reason, American Expressdistinguished itself from Diners Club as the more expensive, yet even more prestigiousoption. Warren Buffett realized this and quickly discovered that the company’sbrand had a huge edge over its competition.
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Business Model
Thebusiness model of American Express is dependent on the frequent spending oftheir cards by consumers. The company would then issue different premium discountrates that encouraged customers to keep using their cards. If customers keepcoming back, then sales numbers are bound to increase. Together, their businessmodel combined with a solid brand created a customer base loyal to AmericanExpress. Warren Buffett loves it when businesses have loyal customers since itallows them to have better control over their prices.
2. Buffett Bought American Express During a Scandal
In1963, American Express was in the middle of a serious scandal that nearly wipedout the entire futures and commodities markets. The scandal originated fromTino De Angelis, a wealthy commodities trader who bought and sold vegetable oilfutures. De Angelis used his massive inventories of commodities to attractloans from well-known Wall Street banks and financers.
His schemes came to an end when on November 22nd, 1963, authorities discovered that the barrels he was shipping over actually contained mostly water. This caused a huge decline for the futures market dragging down American Express shares with it. When Buffett saw the news, his instincts were to ignore the temporary scandal and use it as an opportunity to invest in a great company. American Express’s stock price gradually started to increase after the scandal subsided; making Buffett andhis investors millions.
3. It Helped Him Evolve as an Investor
Thereis no doubt that buying American Express in 1964 helped Warren evolve as aninvestor. American Express pushed him to see the long-term approach toinvesting. Instead of looking for businesses that were ready to go bankrupt, hebegan looking for businesses that had a respectable future.
Sincethe stocks he was buying were going to remain in his portfolio for decadesWarren had to find better quality companies. He started looking for businesseswith good brands, along with great management.
Withthese attributes, Buffett knew that American Express was a great company.Following the Salad Oil Scandal, when most investors would have shied away fromAmerican Express, Warren went all in. Buffett’s famous quote, “only when thetide goes out do you discover who’s been swimming naked”, pays homage to hisinvestment in American Express. His tenacity would lead him to many othersimilar trades in his career.
4. American Express Influenced His Other Genius Investments
WarrenBuffett’s 1964 investment of American Express is almost identical to some ofhis other most famous investments. Buffett started basing his decision to buy stockscentered on the grip an individual company had on consumers. He would thenstart seeing any bad publicity as a positive, if the company itself seemed goodon paper.
Buffet’s Bank Stocks
Aroundthe year 1990, Buffett would acquire a large stake in the bank stock WellsFargo. The company’s management and culture impressed him, resulting inBerkshire Hathaway to own 9% of the company to this day. Warren had alsoinvested in Wells Fargo during a crisis. The early 1990s came with a downturnin California’s real estate market, where Wells Fargo is based in.
M&TBank is another firm that Warren had invested in during the early 1990s. Thebank was in a crisis as well. While everyone else was staying away from thecompany Warren didn’t hesitate to buy as many shares as he could.
Even Goldman Sachs couldn’t escape the capital that Warren could provide. The investment bank was in serious trouble when thecrash of 2007-2008shook the financial world. Buffett used his capital to save Goldman Sachs from a disaster and profited off their bargained stock price.
Coca-Cola & Apple
In1988 Warren Buffett and Charlie Munger sought out the soft drink companyCoca-Cola. The powerful effect of co*ke’s marketing is what attracted Buffett tothe company. Coca-Cola’s brand is what keeps customers coming back to drinktheir soda. Buffett bought about $1 billion worth of Coca-Cola shares shortlyafter the crash of 1987: Coca-Cola’s stock had been severely devalued duringthe crash.
Mostrecently, Buffett decided to invest in Apple after years of notoriouslyavoiding technology companies. Both he and Munger were persuaded by the iPhoneand its capacity to impress consumers. In May of 2016, Berkshire Hathawaybought around 9.8 million shares of Apple stock. During this time, Apple shareprices had hit a bottom. Investors feared that the pressure being put on theiPhone from its competitors would weaken its sales. Since then, Apple has goneup nearly 157%.
The Bottom Line
Wecan see a trend in Buffet’s investment style after the year 1964. Warren likesto buy stocks when nobody else wants to, and he also likes companies with goodbranding and capable management. This is exactly what made his investment inAmerican Express so genius. He figured out that the best investments come fromgreat companies that are in hot waters with the market. A company’s stock priceis different from its actual value. American Express helped him realize thatCharlie Munger’s advice was right and that he could apply it to any greatcompany in the stock market.
