Buffett and American Express: The Salad Oil Scandal Case Study
Warren Buffett bought American Express in 1964 because the salad oil scandal hit a subsidiary, not the franchise: the shares fell about 43%, but cardholders and travellers kept using Amex. He put about 40% of his partnership's capital into the stock, his largest investment to that point. This case study uses Buffett's own letters and reputable histories to show what happened, why he bought, and how the decision scores on the Five Criteria.
Where this fits: this is a lesson in separating a temporary blow from permanent damage. It tests Criterion 2 (durable moat) and Criterion 5 (reasonable price) of the Five Criteria, and shows how Buffett's approach started moving beyond pure Graham-style bargains.
What Was the Salad Oil Scandal?
The salad oil scandal was a commodity fraud that came to light in November 1963. Its centre was Allied Crude Vegetable Oil Refining, a New Jersey company run by Anthony "Tino" De Angelis.
Allied borrowed heavily against vegetable oil it claimed to hold in storage tanks. The collateral was backed by warehouse receipts. Many of those receipts had been issued by American Express Field Warehousing, a small Amex subsidiary whose job was to verify and certify stored goods.
The oil largely did not exist. According to the history of the scandal, Allied claimed far more oil than it actually held, and total losses to lenders and traders ran well above $150 million. Allied filed for bankruptcy in November 1963, and 51 creditors were left holding worthless claims.
Why American Express was in the firing line
Creditors had lent money because an American Express company had vouched for the oil. When the fraud surfaced, claims against the warehousing subsidiary exceeded $150 million, according to Fortune's account of the episode.
The subsidiary could not pay. The question for investors was whether the parent company would, and whether paying would damage the core business.
Amex president Howard Clark answered the first question quickly. Within days, he said publicly that the company felt a moral obligation to see the claims settled. That was admirable. It also frightened shareholders, because nobody knew how large the bill would be.
How Far Did American Express Stock Fall?
The share price reaction was fast and severe. Fortune's reconstruction of the trading gives the clearest figures.
Date | Amex share price | Change from pre-scandal |
20 November 1963 (scandal breaks) | $61.81 | - |
2 December 1963 | $40.00 | About -35% |
2 June 1964 (low) | $35.31 | About -43% |
About two and a half years later | $92.50 | About +50% vs pre-scandal |
Source: Fortune, 2024. Other histories give slightly different rounded figures, such as a fall of "over one-third", but all agree the drop was large and quick.
The fall reflected fear of the unknown. Investors could not size the liability, and headlines about fraud made it easy to assume the whole company was compromised.
Why Buffett Bought: Separating the Wound From the Business
Buffett's insight was that the scandal had hit Amex's balance sheet once, but had not touched the reasons customers used Amex.
The franchise was intact
In the 1960s, the heart of Amex was the travellers cheque and its young charge card. Both depended on one thing: trust in the Amex name at the point of sale. If shops, hotels and restaurants kept accepting Amex, and travellers kept buying its cheques, the franchise was fine.
Buffett's biographers describe him doing simple field research in Omaha, watching whether restaurants and shops still accepted Amex and whether customers still used it. They did. Fortune reports that travellers cheque sales actually rose 12% in 1964, the year after the scandal.
Buffett's own later description
In his 1980 letter to Berkshire shareholders, Buffett compared Amex in 1964 with GEICO in 1976. Both, he wrote, were "one-of-a-kind companies, temporarily reeling from the effects of a fiscal blow that did not destroy their exceptional underlying economics."
He described both as "extraordinary business franchises with a localized excisable cancer." A localised cancer can be cut out. A business whose core economics are broken cannot be saved by a good surgeon.
A classic example of Buffett's franchise test
Buffett later set out what makes a franchise in his 1991 letter. It is a product or service that is needed or desired, that customers think has no close substitute, and that is not subject to price regulation.
He added a line that fits Amex in 1964 exactly: "franchises can tolerate mis-management. Inept managers may diminish a franchise's profitability, but they cannot inflict mortal damage." A poorly supervised warehousing unit was mismanagement. It was not mortal.
How Much Did Buffett Invest?
Buffett gave the details himself in his 1994 letter:
In the mid-1960s, just after the scandal, Buffett Partnership Ltd. put about 40% of its capital into Amex.
It was the largest investment the partnership had ever made.
The position cost $13 million and gave the partnership over 5% of Amex.
Fortune's reconstruction adds that his purchases from mid-April to June 1964 averaged about $41.22 a share. Fortune also reports that Buffett wrote to Amex's management praising its handling of the crisis. His reasoning was that protecting the company's reputation for trust was worth far more than the cost of the claims.
How the settlement played out
Amex eventually settled the claims for about $60 million, or roughly $31.6 million after tax, according to Fortune. That was a real cost. Buffett's 1994 letter notes that Amex earned $12.5 million in 1964, so the after-tax bill was worth more than two years of that year's profit.
Yet it was a one-off. The franchise that produced future earnings kept growing, and the share price more than recovered within a few years.
What Happened Next: Buffett's Long Return to Amex
The partnership later sold its shares, but Buffett came back. By the 1994 letter, Berkshire owned just under 10% of Amex at a cost of $1.36 billion. Buffett pointed out that Amex earned $1.4 billion in 1994, against $12.5 million in 1964.
Berkshire has held a fixed number of shares for decades since. Share buybacks at Amex have steadily lifted its percentage ownership without Berkshire spending more.
Measure | Figure | Source |
Shares held | 151,610,700 | |
Cost basis | About $1.29 billion | |
Ownership at end of 2025 | 22.1% | 2025 letter |
Market value at end of 2025 | About $56.1 billion | 2025 letter |
Dividends received in 2025 | $479 million | 2025 letter |
In his 2023 letter, Buffett noted that Berkshire's share of Amex's 2023 earnings alone "considerably exceeded the $1.3 billion cost of our long-ago purchase." He also wrote that the need for "unquestioned financial trust" is timeless. That is the same quality that survived 1963.
Scoring American Express (1964) on the Five Criteria
Here is how Amex looked at the time Buffett bought, based on the sources above. We do not have reliable return-on-capital figures for 1964, so the scores rely on the qualitative evidence Buffett himself cited.
Criterion | Evidence in 1964 | Verdict |
1. Great business | Travellers cheques and cards needed little capital; cheque sales grew 12% in 1964 | Pass |
2. Durable moat | Trusted brand accepted by merchants and customers worldwide; usage held up after the scandal | Clear pass |
3. Aligned management | Clark chose to honour the claims to protect the brand's trust, at real cost | Pass |
4. Sound balance sheet | Settlement cost about $32 million after tax, painful but survivable | Pass, with a scare |
5. Reasonable price | Shares down about 43% on a one-off loss while the core business grew | Pass |
The important point is where the risk sat. The scandal hit Criterion 4 once, but the market priced it as if it had broken Criterion 2. That gap between perception and reality created the margin of safety.
How We Use the Amex Lesson in the Five Criteria
When a quality company falls sharply on bad news, the Five Criteria gives you a structured way to respond instead of reacting to headlines.
Name the problem precisely. Is it a one-off loss, a lawsuit, a failed product, or a sign that customers are leaving?
Test the moat directly. Look for evidence that customers are still buying: volumes, retention, pricing. Our moat guide explains what to look for.
Size the liability against the balance sheet. Our house rule for Criterion 4 is net debt to EBITDA at or below 2.0x and interest coverage of at least 5x. A one-off bill should not push a company past the point where it must dilute or default.
Judge management by how it handles the crisis. Honest, fast, owner-minded responses are a strong Criterion 3 signal. See how to identify great management.
Only then look at price. If the franchise is intact, a big fall can open a margin of safety. Our margin of safety guide sets the house threshold at 25% or more below conservative intrinsic value.
Having worked in investor relations, I have seen how quickly markets extrapolate from one bad headline. The discipline is to ask what has actually changed in the business, and to write that answer down before you look at the share price.
Worked example: a one-off hit versus a broken franchise
Consider two hypothetical companies, each earning $100 million a year before a crisis, each hit with a $150 million one-off charge.
Measure | Company A: wound | Company B: broken franchise |
One-off charge | $150 million | $150 million |
Customer volumes after crisis | Up slightly | Down 20% |
Earnings two years later | About $110 million | About $60 million |
Value at 15x earnings | About $1.65 billion | About $900 million |
Both took the same hit. Company A lost one and a half years of profit but kept its earning power. Company B lost its earning power, which is far more expensive. Amex in 1964 was Company A.
Common Mistakes Investors Draw From the Amex Story
Buying every fallen star. Buffett bought because he had evidence the franchise was intact. A big price fall on its own is not a reason to buy. Our guide on how to use short-term price movements covers this.
Ignoring the size of the liability. If a legal or fraud bill can bankrupt the company, the moat does not matter. Survival comes first, as we explain in survival first.
Copying the 40% position size. Buffett concentrated heavily because he was confident and competent in the area. Most investors should size positions to survive being wrong. Read position sizing as the ultimate edge.
Mistaking a narrative for research. The story of Buffett checking restaurants is memorable, but the real work was judging whether customer behaviour had changed. Do the equivalent for your own holdings.
Assuming management that pays up is weak. Clark's decision to honour claims cost money but protected the asset that mattered most: trust.
Frequently Asked Questions
Why did Warren Buffett buy American Express in 1964? He concluded that the salad oil scandal was a one-off financial blow to a subsidiary, while the core travellers cheque and card franchise, built on trust, was undamaged. The share price fall gave him a large margin of safety.
How much did Buffett invest in American Express after the salad oil scandal? According to his 1994 letter, Buffett Partnership Ltd. invested $13 million, about 40% of its capital, giving it over 5% of Amex. It was the partnership's largest investment to that date.
What was the salad oil scandal? It was a 1963 fraud in which Allied Crude Vegetable Oil Refining borrowed against salad oil that largely did not exist. An American Express warehousing subsidiary had certified the oil, leaving Amex facing large claims from lenders.
Does Berkshire Hathaway still own American Express? Yes. Berkshire's 2025 letter shows it owned 22.1% of American Express at the end of 2025, at a cost of about $1.29 billion and a market value of about $56.1 billion.
Your Next Step
The Amex story shows why the moat question comes before the price question. Next, see how Buffett combined these ideas into a repeatable method in Warren Buffett's investment strategy, and compare it with another crisis purchase in Buffett and Bank of America. Then learn the broader lessons in lessons from the greatest investors of all time.
About the author: Cameron Hayes is a senior investor relations and finance professional who has worked in IR at Nasdaq Copenhagen-listed companies including Nilfisk and Maersk Drilling. He holds an MSc from Copenhagen Business School and a BCom from the University of Ottawa, and founded Gingernomics to teach individual investors the Five Criteria framework. More about Gingernomics.
The content on Gingernomics is for educational and informational purposes only and does not constitute financial advice. Always do your own research and consult a licensed financial advisor before making any investment decisions. Past performance is not indicative of future results.
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