VALUE: After Hours (S07 E29): The “Salad Oil” Approach to Investing

During their recent episode, Taylor, Carlisle, and Jason Hirschman discussed The “Salad Oil” Approach to Investing. Here’s an excerpt from the episode:

So, guys, I think your audience has probably deeper knowledge of Berkshire Hathaway than any other financial podcast in the developed world. [Jake laughs] So, I think I can reduce my approach to two words that every hardcore Warren Buffett fan knows. And those two words are salad oil. I’ll say it again, because every hardcore Buffett– I heard the little nod there, so you know those words, salad oil.

But for every Gen Z listener who hasn’t memorized all the old school Warren Buffett stories, okay? What was the Salad-Oil scandal? So, back in 1963, America Express had an asset lending operation that made a large loan to Allied Crude Vegetable Oil refining backed by tanks of vegetable oil. Unfortunately, Allied deceived American Express and others by filling those tanks primarily with salt water and a thin layer of veggie oil on top.

So, when the scandal broke, Allied went bankrupt. American Express was hit with claims almost equal to its end of year 1963 market capitalization. But Amex’s warehouse lending business was incorporated as a separate entity. So, Buffett conducted great due diligence and made sure that Amex’s for travelers checks, and budding credit card operation had not lost the confidence support of retail customers, businesses and banks. It had not. So, Buffett’s partnership bought 5% of American Express as it fell in reaction to the scandal.

Salad oil investing, or as I sometimes put it non-operational turnaround investing, is buying a publicly traded stock when the valuation is being hit or held back by something outside its core business operations. I’ve done it with XPEL in 2016 because of the 3M patent lawsuit. I’ve done it with alternative asset managers in 2013 and later actually when their K1 partnership structures kept valuations low. I’ve done it with CME and MasterCard which were far from profit maximizing prior to IPO’ing because of their cooperative ownership structures.

I think there are two other lessons I think from the Amex salad oil scandal which I think are crucial for fundamental investors. First, value investing to me isn’t necessarily low PE or low price to book or low price to cash flow. I’ve read that Buffett bought this Amex stake in 1964 between $35 and $38, but also read that his Amex position was bought, let’s say closer to $41 per share. So, Amex reported $2.52 in earnings in 1963. Before the salad oil scandal, the stock was trading around $63. Even at Buffett’s purchase price, Amex was trading in line with the S&P 500 at the time.

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VALUE: After Hours (S07 E29): The “Salad Oil” Approach to Investing

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