I consider Warren Buffett one of the greatest investors of all time. Another great investor, Chamath Palihapitiya, recently mentioned that he thinks Buffett arguably knows more about the economy than anyone else in the world. I tend to agree.
So, what made him so successful, and is it possible for me to mimic his style? To understand some of the details of his prosperity, I’ve focused on one of his longest holdings, American Express (NYSE:AXP).
The Express train to the top
Buffett’s interest in the company began during the 1960s, when the consumer credit market was booming. But the master investor waited for a golden opportunity. A scandal that involved Allied Crude Vegetable Oil Company committing fraud caused American Express shares to plummet. Recognising that the sell-off was unjustified, he invested $20m for a 5% stake.
The timing and situation he waited for to invest underscores a style he is renowned for. The investor typically buys companies when they are undervalued. Events such as a scandal provide an excellent opportunity as long as the business’s financials and operations can stand the test of time.
Buffett noticed American Express for its financial health even before the scandal. The firm had demonstrated exceptional year-over-year revenue growth from 1954 to 1963, the year when he bought his shares in the business.
What’s amazing is that he still owns the investment today. In fact, because the company has performed share buybacks, his equity in the company has increased. As I write, he owns roughly 21% of American Express. His stake is worth about $33.3bn.
Owning great companies forever
The success of the master investor’s position in one of the world’s most famous credit card companies shows the power of holding the greatest investments indefinitely.
I try to find a set of businesses to own a portion of that I think have strong operational advantages, and I always look for a stable balance sheet.
What I want to identify, just like Buffett did so well, is investments that are going to be able to survive and thrive through crashes, corrections, and depressions. That’s never easy, but a strong amount of equity over leverage on the balance sheet goes a long way.
American Express is still a strong investment to this day, and somehow, it’s still growing fast. Analyst estimates predict this will continue for some time yet.
That being said, the company’s revenues are very dependent on wider economic conditions. Wall Street doesn’t consider it recession-resistant by any means. Obviously, if people have less money to spend, they’re likely to use their Amex cards less.
A balanced perspective
What’s great about the business world is that people can choose the way they want to invest.
Some investors like to take high levels of risk and take a very active role, while others, like Buffett, are about risk mitigation and are more passive. What I think is important is having a balanced perspective and understanding our own strengths and risk tolerance.
After all, how much money we decide we want in life is largely a result of our values. Of course, I have to be aware I can lose money in the markets. And wealth generation always takes an active eye and mind, even if the income is passive.
