American Express

# 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.