Warren Buffett’s long-standing investment in American Express is one of the best examples of his value investing philosophy and belief in economic moats. Buffett first invested in American Express in 1964, at a time when the company was facing a major financial scandal. Despite the crisis, he saw the strength of the brand, its entrenched customer base and its ability to recover, making it one of his earliest successful contrarian investments.
Over the decades, Buffett continued to increase Berkshire Hathaway’s stake in American Express, making it a core holding in his portfolio. As of 2024, Berkshire owned over 20% of American Express, a position worth more than $25bn. This investment has delivered enormous long-term returns, thanks to American Express’s strong profitability, shareholder-friendly policies and dominance in the financial services industry.
Buffett’s American Express strategy highlights how to identify companies with durable competitive advantages, the power of holding investments long-term and why crises can create exceptional buying opportunities. For investors, this case study provides valuable lessons on finding businesses with economic moats and understanding the importance of patience in wealth creation.
WHY BUFFETT INVESTED IN AMERICAN EXPRESS
Buffett’s investment philosophy revolves around buying companies with strong brands, high returns on equity and competitive advantages that protect them from rivals. American Express fits these criteria perfectly.
Brand strength: A globally recognised financial services company
One of Buffett’s most important investment principles is finding companies with brand strength that creates pricing power. American Express has one of the most powerful brands in financial services, known for its prestige, customer trust and premium positioning.
Unlike mass-market credit cards, American Express has positioned itself as a high-end brand, offering exclusive perks, travel benefits and a reputation for serving affluent customers and businesses. This brand image allows American Express to charge higher fees to both consumers and merchants, making it significantly more profitable than competitors like Visa and Mastercard.
Buffett has long favoured companies that can raise prices without losing customers and American Express’s premium brand allows it to do exactly that.
Loyal Customer Base: High Retention Among Cardholders and Businesses
Buffett prioritises companies that have sticky customer relationships, meaning customers are unlikely to switch to competitors. American Express excels in this area by offering:
- Exclusive rewards programmes and travel benefits, which create a strong incentive for customers to keep using their cards.
- Deep business relationships, especially with corporate clients who use American Express for expense management and travel services.
- Superior customer service, which reinforces loyalty and brand prestige.
This high customer retention means steady revenue, repeat business and strong long-term growth – a key factor in why Buffett continues to hold American Express.
Competitive moat: Strong network effects and barriers to entry
Buffett looks for companies with competitive moats that make it difficult for rivals to take market share. American Express benefits from multiple layers of competitive protection:
Network effects: The more businesses that accept American Express, the more attractive it becomes for consumers – and vice versa. This creates a self-reinforcing cycle of growth.
Premium merchant fees: American Express charges higher transaction fees than Visa or Mastercard and merchants are willing to pay because American Express customers tend to spend more per transaction.
High barriers to entry: The financial services industry is heavily regulated, making it difficult for new players to compete with established networks like American Express.
For Buffett, companies with deep moats tend to generate long-term value and American Express has maintained its dominance for decades.
KEY MOMENTS IN BUFFETT’S INVESTMENT IN AMERICAN EXPRESS
The 1963 salad oil scandal: Buffett’s bold contrarian move
One of the most defining moments in Buffett’s investment history was his decision to buy American Express stock in 1964, during the infamous ‘salad oil scandal’.
The scandal involved Allied Crude Vegetable Oil, a company that used fraudulent accounting to inflate its inventory of salad oil. American Express, which had loaned money using this fraudulent inventory as collateral, suffered major financial losses when the fraud was exposed. The company’s stock price collapsed by nearly 50% and investors feared it would go bankrupt.
However, Buffett saw beyond the short-term crisis. He analysed American Express’s underlying business strength, recognising that while the scandal hurt its balance sheet, the company’s core brand and customer relationships remained intact.
Instead of panicking, Buffett invested $13m (about 40% of his partnership’s assets at the time) into American Express stock. His bet paid off – within a few years, American Express recovered and Buffett’s investment skyrocketed.
This moment solidified Buffett’s belief that short-term market overreactions create long-term opportunities for rational investors.
How American Express rebounded and became a financial powerhouse
Following the scandal, American Express rebuilt its reputation and expanded its financial services offerings. Over the next few decades, it:
- Strengthened its corporate and premium cardholder business.
- Expanded internationally and built a global payment network.
- Developed a high-margin lending business, offering credit to businesses and individuals.
Throughout these changes, Buffett never sold his stake. Instead, he continued adding to his position, recognising that American Express had solidified its moat and would be a long-term winner.
Berkshire Hathaway’s consistent ownership and growing stake
Buffett’s conviction in American Express has remained unwavering for over six decades. Berkshire Hathaway gradually increased its stake and today, it owns more than 20% of the company, making it one of the largest shareholders.
Despite market fluctuations, Buffett has never sold his position, instead benefiting from decades of compounding returns.
PERFORMANCE OF THE INVESTMENT
How American Express has delivered strong returns for Berkshire Hathaway
Buffett’s initial investment in American Express has grown from millions to billions, generating tremendous capital appreciation and dividends. The company’s stock price has multiplied many times over since the 1960s and Berkshire Hathaway has collected billions in dividends along the way.
The role of dividends and share buybacks in compounding returns
American Express follows a shareholder-friendly capital allocation strategy, which aligns perfectly with Buffett’s investment philosophy. The company:
- Pays consistent dividends, providing Buffett with steady income.
- Aggressively repurchases its own shares, which increases the value of Buffett’s stake without him needing to buy more shares.
Buffett loves companies that use buybacks effectively, as they increase his ownership percentage over time. American Express’s share buybacks have helped Berkshire Hathaway maintain a larger share of the company without additional investment.
LESSONS FOR INVESTORS
How to identify and invest in companies with durable economic moats
Buffett’s success with American Express demonstrates the power of investing in companies with strong, lasting competitive advantages. Investors looking for similar opportunities should focus on:
- Brand strength and customer loyalty.
- Consistent profitability and high returns on equity.
- A business model with strong pricing power.
By identifying businesses that dominate their industry and resist competition, investors can find long-term winners.
Why short-term crises can create long-term investment opportunities
Buffett’s purchase of American Express during the salad oil scandal is a lesson in contrarian investing. Markets often overreact to temporary problems, creating buying opportunities for patient investors.
When analysing crisis-hit companies, investors should ask:
- Does the company have a strong underlying business?
- Will the brand and customer base remain intact?
- Is the issue temporary or permanently damaging?
By answering these questions, investors can separate fear-driven market reactions from real long-term risks.
CONCLUSION
Warren Buffett’s investment in American Express is one of the greatest examples of long-term value investing. He identified a powerful brand with an economic moat, bought during a crisis and held on for decades of compounding returns.
For investors, the key takeaways are clear: focus on strong businesses, think long-term and use market downturns as opportunities to buy high-quality stocks at discounted prices.
This Trustnet Learn article was written with assistance from artificial intelligence (AI). For more information, please visit our AI Statement.