In 1963, world’s largest credit card company, American Express got trapped in a huge financial scandal of worth Rs $175mn.
As the news of the fraud broke, the company’s share price halved. Investors were caught up in panic. There comfort got tossed up high.
Amidst all, an 35-year old man wearing some “leather shoes” came forward displaying audacity to go against the flow. Warren Buffett then poured out almost, as said, all his cash in this single stock and this is where this name came from: ‘Salad oil scandal’.
Amidst all the hassle, nobody paid the attention to the fourth subsidiary- Warehousing Operations. This tiny division built a business on certifying the value of inventories of other businesses.
The scam was based on simple science- ‘when salad oil was poured on water, it rose up and formed a film on the top.’ By filling tanks with water, and then adding a little salad oil, Anthony De Angelis fooled AmEx into thinking that he owns $175mn in soy based oil rather than contaminated, worthless water.
Problems only started when a few curious souls began to wonder how the soy bean oil stored in De Angelis’ tanks contained more soybeans than the output of the entire industry.
In November 1963, De Angelis and his company, the Allied Crude Vegetable Oil Refining Corporation, filed for bankruptcy. AmEx was now on the hook for millions of his liabilities!
The stock plunged. Buffett, though, kept his cool and followed 3 simple processes which could be a learning for the investors.
Here are the lessons which an investor could learn from this process:
- Understand the value of independent research
- Make uncertainty work for you, not against you
- Use the power of conviction