Berkshire Hathaway 2018 Annual Meeting Audience Question # 35

American Express is still a “remarkable” company

Warren Buffett:

OK, Gregg?

Gregg Warren:

Warren, if we look at the performance of your equity investment portfolio the last three to five years, some of the strongest performances come from Visa and MasterCard, which put up returns that are three to four times greater than American Express.

Unfortunately, your holdings of the two names, which we assume were held by Todd or Ted, have accounted for less than one percent of stock holdings on a combined basis the past five years, while American Express has tended to be a top-five holding, accounting for 10 percent of the portfolio, on average, and closer to 8 percent of late.

Given that all three firms benefit from powerful network effects along with valuable brands, were there any particular reasons Berkshire did not ramp up its stakes in Visa and MasterCard to more meaningful levels, especially during those years when American Express was struggling?

After all, you’ve shown a willingness to own several stocks from the same industry, holding shares in several competing banks, and buying stakes in all four domestic airlines in fairly equal amounts when you picked them up in late 2016.

Warren Buffett:

Yeah. When Ted and Todd, or either one of them… I won’t get into which specifically… which one of them specifically… bought, or for that matter they could both have bought… Visa and MasterCard… they were significant portions of their portfolio.

And there was no embargo or anything on them owning those stocks because we had a big investment in American Express. And I could have bought them as well. And, looking back, I should have.

On the other hand, I think American Express has done a fabulous job, and now we own 17 and a large fraction percent of a company that not that long ago we may have owned 12 percent.

We’ve done it without spending a dime and without… you know, it’s a company that has really done a fantastic job in a very competitive field where lots of people would love to take their customers away from them. But they have more customers than ever, and they’re spending more money than ever. The customers are.

And the international growth has accelerated. The small business penetration is terrific. It’s really quite a business. And, you know, we love the fact we own it.

Like I say, it didn’t preclude me from, in any way, from buying MasterCharge or Visa. And if I had been as smart as Ted or Todd, I would have.

Charlie?

Charlie Munger:

Well, we would have been a little… a lot better with all of our stock picking if we could do it in retrospect.

But… at the time, we have a big position in American Express, and there is one tiny cloud on the horizon of the payments processors and that is the system of WeChat in China.

And so it isn’t as though there isn’t a little cloud somewhere off in the… and I don’t have the faintest idea how important that cloud is, and I don’t think Warren does either.

Warren Buffett:

No. No. Payments are a huge deal worldwide. And you’ve got all kinds of smart people working at various ways to change the payment arrangements. And…

Charlie Munger:

To destroy what we have now.

Warren Buffett:

Sure, sure. And you’ve got some very smart people that, you know, I am… the… but there… building a company.

And American Express made a decision a few years ago not to bid as low as somebody else did to retain the Costco business. And I think… Charlie and I disagree on this… but I think it was a smart decision. He doesn’t think it was a smart decision. But one of us will be right. And… and one of us will remind you that they were right.

The… but if you look at American Express, it is… it’s a remarkable company. I mean, you know, they came after them with Sapphire last year. People want that business. And payments are changing.

And you can see in different countries different ways things are going on in that. And there are a lot of people that will play the game of gaming the system, and switch from one to another based on the rewards on this card or that, and all of that sort of thing.

But there also is a… I think there’s a very substantial group for which American Express does something very special, and they keep capitalizing on that premier position with that group.

And they’re doing it successfully around the country. And you’ll see in the first quarter… you’ve seen in the first quarter… you know, where in Britain, in Mexico, in Japan, you’re seeing gains of 15 percent or better in local currencies.

And the base is not tiny, but it’s not huge, so there’s a lot of room left to go in that. And the small business penetration is good. The loan portfolio has behaved sensationally compared to, really, just about anybody.

So, I like very much our holdings of American Express.

The first half, because of the accounting changes, they had to suspend their repurchase program for six months. But I… they’ve announced that they expect to renew it.

And someday we’ll even, you know, we’ll own a greater percentage of American Express and it will be a bigger company, in my opinion. And I think we’ll do very well.

But as Charlie says, nobody knows how payments is… for sure… comes out. And nobody knows how autos for sure come out. And there… that is true of a great many businesses we’re in, and we’ve faced it before.

We used to buy things that were certain failures, like textiles and second-rate department stores and trading stamps in California. Now we just face things that face real difficulty. So we’re actually moving up the ladder.

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