The Salad Oil Scandal, American Express, Warren Buffet and why you should buy Manulife.
In the late 1950’s, subsidized U.S. farmers created a soybean oil surplus. Tino De Angelis and his company Allied Crude Vegetable Oil, had a great idea. Buy up the entire soybean oil surplus, which was used to make everything from salad dressing to paint, and ship the oil abroad using government aid programs. To corner the market, Allied needed lots of capital to purchase modern equipment, pay high wages and lease over 100 giant oil tankers. There was just one problem, Allied never bought any oil. The company duped investors by filling its tankers with water and a few feet of oil. Since oil floats above water, it appeared to port inspectors that the ships were loaded with oil. In 1963 it all came crashing down and lenders to Allied lost $150 million dollars (over $1 billion in today’s dollars).
American Express took one of the worst hits in the scandal as its subsidiary, stored, inspected and vouched for the oil that was used as collateral for bank loans. American Express’ stock promptly dropped 50% and many feared the company would go bankrupt. As legend goes, a young Warren Buffett, decided to make a huge investment in American Express, after having lunch in a restaurant and seeing people all around him continue to use their American Express credit cards. Although the company made a very bad investment and did a poor job of due diligence it survived and thrived because its main product, credit cards would always be needed.
Manulife Financial made a similar mistake with its segregated mutual fund business. The company guaranteed returns but never properly insured for a severe drop in the stock market (oh the irony). Manulife has rectified this problem and we believe that investors should buy its stock. Manulife is one of the most recognized franchises in North American and its main product, insurance, will always be needed. The company which once traded at a premium multiple to the Canadian banks is now trading at a 25% discount. Maybe I should give Warren a call?