Warren Buffett: Why We Bought American Express

Key Concepts

• American Express Adaptation: The company’s historical ability to evolve from an express delivery service to travelers checks and then credit cards.
• Internet Adoption: Warren Buffett and Charlie Munger’s differing views on the internet’s value and impact.
• Silver Investment: Berkshire Hathaway’s past investment in silver and its subsequent disinterest in the market.
• Geico’s Business Model: The success of Geico’s low-cost insurance model and its reliance on efficient cost management.
• Synergy & Acquisitions: Discussion on the potential (and rejection) of synergistic combinations between Berkshire Hathaway companies.

American Express & Historical Adaptation

The discussion began with a reflection on American Express’s remarkable history of adaptation. Initially an express company transporting trunks and valuables, it transitioned to travelers checks with the rise of railroads, and ultimately to credit cards in response to competitors like Diner’s Club. Diner’s Club initially priced its card at $3, but American Express strategically priced theirs at $5, cultivating a more prestigious image. As stated, holding an American Express card conveyed a sense of status akin to J.P. Morgan, while Diner’s Club was perceived as associated with expense account misuse. This demonstrates a keen understanding of branding and market positioning. Berkshire Hathaway currently owns 15% of American Express, a testament to their confidence in the company’s continued adaptability.

The Internet: Differing Perspectives

The conversation then shifted to the internet, revealing a stark contrast in perspectives between Warren Buffett and Charlie Munger. Buffett acknowledged using the internet for activities like playing bridge and conducting searches, stating, “It cost me $100 a year or something like that. If I had to give up the plane or I had to give up the internet, I wouldn't want to give up either one of them, but I give up the plane.” He highlighted the convenience and improved connectivity it offers, contrasting the difficulty of arranging a bridge game in person with the ease of online play.

Munger, however, expressed strong dislike for the internet and multitasking, stating, “I don’t like multitasking. I see these people doing three things at once and I think God what a terrible way that is to think.” He emphasized his need for deep, focused thought and found the concept of multitasking unproductive. Despite his reservations, Munger conceded the internet’s growing importance, acknowledging, “It is here and it’s going to be more and more important and everybody’s going to think more about it and do more about it like it or not.” Berkshire Hathaway currently employs three “Bloomberg” terminal users, a fact Munger jokingly noted he was unaware of.

Impact of the Internet on Businesses

Buffett emphasized the significant impact of the internet on Berkshire Hathaway’s businesses, specifically citing Geico. The internet has “changed Geico’s business very very dramatically,” affecting all of their holdings to varying degrees. He expressed optimism about continued technological advancements and their potential to improve life, even if Munger remains skeptical.

Silver Investment & Market Dynamics

The discussion touched upon Berkshire Hathaway’s past investment in silver, where they once held over 100 million ounces. Buffett admitted they “didn’t do that well” with the investment, though they fared better than the Hunt brothers (referencing the infamous Hunt brothers’ attempt to corner the silver market in the late 1970s). He explained that silver’s price is largely influenced by its production as a byproduct of copper mining, rather than its own supply and demand, making it a complex market. He stated they “haven’t paid much attention to it for a long long time.”

Geico’s Low-Cost Model & Independent Operations

Buffett lauded Geico’s low-cost business model, attributing its success to Tony Nicely’s effective cost management and the ability to offer “first class insurance at a better price.” He dismissed any potential for synergistic combinations within Berkshire Hathaway companies, stating, “I think that those two companies will do better if run as two independent businesses than if we try to push through something.” Munger emphatically agreed, calling such an idea “a very dumb idea” and definitively stating, “we’re not going to do it.” This reflects a philosophy of allowing strong, independent businesses to operate autonomously.

Logical Connections & Synthesis

The conversation flowed organically, connecting historical business adaptation (American Express) to current technological disruption (the internet). The discussion of silver served as a cautionary tale about speculative investments, while the focus on Geico highlighted the importance of a sustainable, efficient business model. Throughout, the contrasting viewpoints of Buffett and Munger provided a nuanced perspective, demonstrating the value of diverse thinking in investment decision-making.

The central takeaway is the importance of adaptability, a keen understanding of market dynamics, and a focus on long-term value. While acknowledging the inevitability of change, the speakers emphasized the need for disciplined investment strategies and a commitment to fundamental principles. Buffett’s embrace of the internet, despite Munger’s skepticism, illustrates a pragmatic approach to embracing new technologies while remaining grounded in core values.