The Scandal That Made Buffett Rich

Dear friends,

What would you do if your favorite stock dropped 50 percent overnight because of a massive corporate scandal?

Most people would panic. Most people would sell.

Warren Buffett bought more.

In one of the greatest investing plays of all time, a young Buffett made a bold bet on American Express right in the middle of a national fraud scandal. He didn’t buy because the business was perfect. He bought because the brand was stronger than the headlines.

Here’s how it happened—and what it can teach us about conviction.

The Salad Oil Scandal That Shook Wall Street

It was 1963, and everything looked great on the surface. American Express was booming. The U.S. economy was strong. And a company called Allied Crude Vegetable Oil was using tanks of salad oil as collateral to borrow millions of dollars.

Then the truth came out.

The tanks that were supposed to be filled with salad oil were mostly water. Allied had tricked auditors by floating a thin layer of oil on top of each tank. The dipstick tests looked legit, but underneath the surface was nothing but water. A classic con.

When the fraud unraveled, it sent shockwaves through the financial system.

American Express had guaranteed warehouse receipts tied to these fake oil reserves. They weren’t the ones committing fraud—but they were on the hook for it. Loss estimates shot past $60 million, a staggering number at the time. The market reaction was brutal.

AmEx stock dropped more than 50 percent in a matter of days. Lawsuits were filed. Executives were grilled. Analysts cut their ratings. Headlines called it one of the worst corporate scandals in U.S. history.

And most damaging of all, the public began to question the integrity of American Express.

This wasn’t just about balance sheets. American Express was a trust business. Their entire value came from credibility. And in an instant, that credibility was under fire.

People stopped trusting the system. And when trust disappears, stock prices fall fast.

Everyone on Wall Street was running for the exits.

Except Buffett.

Buffett’s Bold Move

While the rest of Wall Street panicked, a 33-year-old Warren Buffett started buying.

He didn’t run spreadsheets to forecast legal losses. He didn’t dive into balance sheet footnotes or try to time a technical bottom. Instead, he went to lunch.

Buffett began walking around town, asking restaurant owners, store managers, and gas station attendants one simple question:

"Are people still using their American Express cards?"

The answer was yes.

The public was outraged by the scandal, but they weren’t canceling their cards. Diners still paid with AmEx. Travelers still trusted the brand. Businesses were still using the company’s traveler’s checks. The scandal had shaken investors, but not customers.

That told Buffett everything he needed to know.

He wasn’t betting on oil tanks or accounting statements. He was betting on brand loyalty and human behavior. In his mind, the core business was untouched. The scandal was a one-time event. The brand was still trusted where it mattered most—at the cash register.

So he made his move.

Buffett deployed more than 40 percent of his entire investment partnership into American Express stock. At the time, this was an enormous risk. The company was under legal pressure, facing massive payouts, and getting torched in the press.

But Buffett knew something the market didn’t.

He knew people wouldn’t stop using the card.

The Psychology of Conviction

It’s easy to look back and admire Buffett’s decision now that we know how it played out. But in the moment, it looked reckless.

There was no guarantee the lawsuits wouldn’t bankrupt the company. There was no proof that American Express could rebuild public trust. And there was certainly no precedent for putting nearly half your portfolio into a stock tied to a national scandal.

But Buffett wasn’t focused on what could go wrong.

He was focused on what had not changed.

The scandal dominated the headlines, but the day-to-day business was untouched. He kept asking the right question: is the business model still working?

And the answer was yes.

American Express had what Buffett would later call a “moat”—something that protected its brand and allowed it to thrive regardless of short-term events. Back then, he didn’t use that word yet. But the instinct was already there.

Where most investors saw reputational damage, Buffett saw customer habit.
Where others saw lawsuits, he saw brand strength.
Where others reacted to fear, he looked at behavior.

It wasn’t about ignoring risk. It was about understanding which risks mattered.

Buffett didn’t need the stock to bounce next week. He was investing with a multi-year lens, trusting that the market would eventually catch up to reality.

The Payoff

Buffett’s bet paid off faster than anyone expected.

American Express stabilized its reputation, settled its legal issues, and went right back to growing. Within three years, the stock tripled. Buffett’s partnership turned a $13 million investment into nearly $40 million.

But it wasn’t just the money that mattered.

This became one of the most important investments of Buffett’s early career. It taught him something that would shape his entire philosophy going forward—that the strength of a brand, and the behavior of customers, could matter far more than what was on a quarterly report.

He later called it his first real lesson in understanding a durable competitive advantage. In this case, the brand was the moat. American Express had something no fraud could destroy: trust where it counted most, in the minds of consumers.

Years later, Buffett would call brand loyalty and customer behavior "intangible assets"—the kind that don’t show up on balance sheets but often matter more than anything else.

The oil tanks were filled with water, but the investment was pure gold.

What You Can Learn

Most investors would have run from American Express.

The headlines were ugly. The legal exposure was real. And the stock had been cut in half. But Buffett didn’t ask what the news said—he asked what the customer was doing.

That’s the difference between panic and conviction.

He wasn’t investing based on perfect financials. He was investing in a company that still had trust, still had demand, and still had a moat that the market couldn’t see clearly in the moment.

Here’s the lesson.

Bad headlines don’t always mean a bad business. When a great company stumbles, and the core is still strong, that’s often where the biggest upside lives. You have to zoom out, understand the bigger picture, and ignore the emotional noise.

Buffett’s play on American Express wasn’t just about guts. It was about logic. The same logic you can apply today.

Ask yourself:

• Has the business fundamentally changed?

• Are customers still loyal?

• Is the problem temporary or permanent?

• And is fear creating a price that doesn’t match reality?

Because sometimes, the best investments are hiding inside the worst headlines.

And Buffett’s salad oil play proved it.

Cheers!

Matt Allen

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