Many of us know that American Express(股票代號: AXP) has been a long time holding in Berkshire Hathaway(股票代號: BRK-A, BRK-B)’s equity portfolio, but did you know the story behind the purchase?
In the 60′s, American Express through a third party verified the $60 million collateral used for a loan in excess of $175 million(close to $2 Billion in nominal term) for the then salad oil king. When the salad oil king defaulted on the loan, the creditor moved in to seize the tanks full of salad oil, but to their surprise the salad oil were never there. American Express was ultimately found responsible for the creditor’s loss, as a result, the market hammered the share price of American Express, ruthlessly.
The then young Warren Buffett saw this, and reasoned that, the other business segments of American Express were fully intact, the beat down of the share price was excessive on an isolated event. American Express had the ability to absorb such loss, there was no difference from the company paying out a one time dividend the amount of the total liability owed. Buffett consequently began amassing the shares while the world was selling. Needless to say what happend afterward.
As far as JP Morgan Chase(股票代號: JPM) is concerned, a long term investor should start paying attention and judge for yourself if a repeat of the salad oil scandal is about to surface. The initially reported net loss was $800 milliion, and then it was later revealed the mark-to-market loss on that specific instrument was $2 Billion. Some analysts estimated that by the time the synthetic credit derivative position is completely unwinded, the total loss would be as much as $4 Billion. My view is, even if the net loss is equivalent to the bank’s total one year net income, which is $17 Billion plus, more than four times the estimated largest loss, and wiped out the bank’s earning for the entire year, it should not affect the rest of the business units, which have been extremely robust. In my opinion, the core of the bank’s business is very strong, the market has short term memory, the bank’s reputation will prevail, and JPM remains one of the best banks, if not the best, in the entire world.
So far the market has punished the company by pushing down the stock 10%, I would really start paying attentiion, if the margin of safety continues to expand much further. If the company can make $17 billion dollars a year, without absolutely any kind of future growth, I would still value this company today at $170 Billion, which is already higher than the current market cap JPM is trading at. Obviously, the regulator’s view of this incident will impact the implementation of Dodd Frank and especially the Volcker rule, this is going to negatively effect money center banks’ future propsects. Nonetheless, when the market over zealously takes down an otherwise healthy company, it is time to unleash one’s ability to think with your head, and not with your heart attitude, and position yourself to benefit from market turmoil.
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