American Express

American Express is one of Berkshire Hathaway's longest-held investments and a perfect example of a business with a durable competitive advantage based on brand strength and network effects.

The Investment

Berkshire began buying American Express in 1964, following the "salad oil scandal" that temporarily devastated the stock price. The scandal involved a fraud at a subsidiary, but Buffett recognized that American Express's core business—its charge card franchise—was unimpaired.

"The salad oil scandal created an opportunity to buy a wonderful business at a distressed price."

Berkshire invested approximately $13 million in American Express, representing a significant portion of the partnership's capital. The investment has since grown to be worth billions.

The Competitive Advantage

American Express's moat comes from several sources:

Brand Prestige

The American Express card is associated with affluence and exclusivity. This brand positioning allows the company to charge premium fees and attract high-spending customers.

Network Effects

American Express benefits from a two-sided network effect. Merchants accept the card because affluent customers carry it. Customers carry it because merchants accept it. This creates a virtuous cycle that strengthens over time.

High-Spending Customer Base

American Express cardholders spend significantly more than holders of other cards. This generates higher interchange fees and makes the business highly profitable.

The Business Model

American Express operates a closed-loop payment network, meaning it both issues cards and processes transactions. This differs from Visa and Mastercard, which only process transactions.

The closed-loop model gives American Express:

• Direct customer relationships
• Rich data on spending patterns
• Control over credit risk
• Higher margins per transaction

Why It Fits Buffett's Criteria

1. Simple business — Processing payments is easy to understand
2. Durable moat — Brand and network effects are long-lasting
3. Predictable cash flows — Payment volume grows with the economy
4. Excellent returns on capital — The business requires minimal reinvestment

Conclusion

American Express exemplifies the kind of business Buffett seeks: a wonderful franchise with a durable competitive advantage, purchased at a reasonable price. The investment has compounded at extraordinary rates for nearly six decades.