top of page
  • Writer's pictureIshfaaq Peerally


How often do you invest in a company for the first time to see it go up by 6% the next day? $GME is up by 6% today. Obviously, I want the price to go down so that I could buy more but even with this 6% gain, the stock is well under its intrinsic value. This stock is a prime example of a cigar butt. I'll talk more about this stock soon in a video and an article on the membership group which I'm creating.

$FB up by 0.6% after Mark Zuckerberg had a constructive meeting with Donald Trump yesterday. $SWKS recovery continues with the stock up by 1.5%. $CXO up by 1.8% with rising $OIL prices. Surprisingly, $PE is down today.


In 1965, Warren Buffett made a major change to his investing style. He invested in American Express $AXP . Before that, he was following the path of his mentor, Benjamin Graham, by investing in cigarette butts stocks. These are stocks which are trading at very low valuations compared to their intrinsic value. Benjamin Graham was a mathematician. He did not care much about the companies he was investing in. What mattered to him were the numbers. When Warren Buffett invested in American Express, it was already a big company and he did not invest solely because of the numbers. There was some accounting frauds(Salad Oil Scandal) in one of the subsidiaries of American Express and there was a big selloff of the stock. Warren Buffett realized the value of the American Express brand, that people were still using American Express cheques and cards and that this selloff was an overreaction of the market and he invested in American Express although it was far from being a cigarette butt. To this day, Berkshire Hathaway $BRK.B still owns 17.9% of American Express. This is his second best investment ever after Coca Cola $KO .

American Express is today the largest credit card issuer in the world but it started in 1850 as an express mail company. American Express was founded by Henry Wells and William Fargo, the founders of Wells Fargo $WFC . They moved into money delivery then investment banking(they even merged with Lehman Brothers at some point). It was only in the 1940s that they started their credit card and charge card business. During the 2008 Financial Crisis, they registered as a Bank Holding Company to benefit from TARP. Therefore, they are subject to banking regulations.

To understand how American Express makes money, you should understand the credit card system. There are 5 main players: customer, merchant, issuer, processor and network. The issuers and processors are usually banks while the network are usually Visa $V and MasterCard $MA . What is American Express? It is both an issuer and a card network. If you have a JPMorgan Palladium Credit Card. It is issued by JPMorgan $JPM but it runs on the Visa network. It is impossible for JPMorgan to issue a credit card without a network(it is not feasible to build one). Visa also is useless without a bank issuing the credit card. This is what gives American Express its moat. They issue their own credit card which runs on their own network.

American Express is targeting rich people. The fees are higher compared to other cards but they also provide a lot of benefits including travel points and insurance.

Business segments of American Express:

1. Global Consumer Service Group (47% of revenues) - acts as an issuer

2. Global Commercial Services (29%) - for corporations

3. Global Merchant and Network Services (16%) - acts as a card network

They don't add to 100% because I didn't count interests

On average the revenues, net income and cash flows are growing by about 2% p.a. This is at the same rate as the economy and it is not surprising.

I won't say that American Express is expensive today, it is fairly valued but for such growth, I will need a big discount. This is one of the best businesses I know of. The branding they, the customer loyalty is something other businesses fight for. In the future, there will be new payment methods such PayPal $PYPL or Facebook Libra $FB or even Bitcoin $BTC and others but they don't really target the niche that American Express is in, that is the rich and super rich.

1 view0 comments
bottom of page