What Buffett's American Express Investment Teaches Us About How Patient Investors Win

When American Express’s stock crashed from $60 to under $30 in 1963 after a massive fraud involving salad oil inventories institutional investors fled en masse. Buffett did the opposite—he invested 40% of his partnership’s assets in the company, ultimately turning $13 million into one of his most legendary investments. Within a couple of years, the stock had climbed to $92.50, a 124% gain, while the Dow Jones Industrial Average lost 6%.

The episode teaches two crucial lessons: First, it marked Buffett’s pivot from the approach favored by his mentor, Benjamin Graham—buying broken companies cheap—to buying quality businesses in temporary trouble. Second, Buffett could make this bet precisely because Wall Street institutions couldn’t, highlighting an advantage that researchers say individual investors still often have today.

Amex’s Greasy Slip: The Salad Oil Scandal

In the early 1960s, commodity trader Anthony De Angelis orchestrated one of Wall Street’s most outlandish and lucrative frauds, creating fake warehouse receipts for $175 million in non-existent salad oil—equal to about $1.85 billion in today’s dollars. The scheme, dubbed the salad oil scandal, unraveled spectacularly, leaving American Express potentially liable for $150 million through a subsidiary that had guaranteed the receipts. Shares of American Express hit a low of $35.31 on June 2, 1964, down 45% from it’s recent high of $63.88 in October the year prior.

While Wall Street panicked, Buffett saw opportunity. He recognized that the company’s credit card and traveler’s check businesses remained strong, as the scandal hadn’t affected what mattered most: consumer trust on Main Street. His research confirmed that customer use of Amex cards and checks hadn’t fallen off.

Meanwhile, managers at Wall Street’s investing institutions who held American Express faced a brutal choice: explain to clients why they owned a fraud-tainted stock or sell and protect their careers. Buffett faced no such dilemma. With no bosses to appease in the short term, he could buy what others were forced to sell and wait for the stock’s recovery.

Buffett’s Contrarian Bet

Buffett invested $13 million—40% of his partnership’s assets—into American Express. This wasn’t diversification—as he often quipped —people diversify “from ignorance.” It was pure conviction. Looking back in the mid-1990s, Buffett told Berkshire Hathaway (BRK.A, BRK.B) shareholders that Amex was a “one-of-a-kind” company, “temporarily reeling from the effects of a fiscal blow that did not destroy [its] exceptional underlying economics.”

In that same letter, Buffett drew a sharp distinction between his approach and others in a moment that’s easy to miss. He contrasted Amex and GEICO (another of his legendary investments) with what he called “true ‘turnaround’ situations,” where managers must pull off “a corporate Pygmalion.” Those bets, he warned, are fragile—many companies never make it. His own focus, instead, he wrote, was on “extraordinary business franchises with a localized excisable cancer (needing, to be sure, a skilled surgeon).”

In the 1960s, then, Buffett was moving beyond Graham’s playbook of buying statistically cheap, often dying companies. However, he was also steering clear of what would become a dominant model for private equity that emerged decades later—buying distressed businesses, piling on debt, and hoping for a turnaround that often never comes, taking the company with it.

Buffett’s American Express play would become his signature: buying fundamentally excellent businesses struck by temporary, fixable problems. That nuance—buy quality franchises at crisis prices, not cheap or broken companies—would define his career and become his investment approach.

Why Wall Street Insiders Couldn’t Hold On

Another part of the episode that’s easily overlooked is how quickly Wall Street abandoned shares of American Express. While the institutional fund industry was still nascent in 1963, the exodus demonstrates an advantage that researchers say individual investors still possess today.

“If they have poor performance for even a short window of time, [limited partners] can pull their capital from the fund,” explains Kalash Jain, a Columbia Business School researcher whose recent study with colleague Dian Jiao reveals how Wall Street’s structural “myopia” creates opportunities for patient individuals. Their research shows that stocks dominated by short-term institutional ownership underperform those with patient shareholders by 5% to 6% annually—a gap that widens to 7% to 8% during periods of market volatility.

Retail investors, Jain notes, “should be comfortable investing in companies that may have some risks in the near term, provided they feel the long-term fundamentals of the company are strong.” Buffett’s American Express investment during the salad oil scandal, he says, is “a classic example” of exploiting this advantage.

The Bottom Line

Buffett’s American Express play proves that patience is often the individual investor’s secret edge. Wall Street’s institutions frequently can’t afford to sit through short-term pain, but perhaps you can. The lesson? Focus on great businesses in temporary trouble, and use the one advantage even the best-paid pros can’t afford: time.