Buffett Cigar Butt Days - Sanborn Maps and American Express Plays

Look, everyone knows Warren Buffett as the guy who buys great companies and holds them forever. But early in his career, he played a completely different game – digging through forgotten, neglected, and mismanaged companies looking for hidden value. Two investments from that era stand out: a ruthless activist play on a dusty map company, and a bold contrarian bet during one of the wildest corporate scandals of the 1960s.

Let me walk you through both.

Sanborn Maps – The Company Nobody Cared About

Sanborn Maps published absurdly detailed maps of every city in the United States. Fifty-pound volumes for a single city like Omaha, showing water main diameters, fire hydrant locations, roof compositions – everything a fire insurance company needed to evaluate risk from a central office.

For seventy-five years, Sanborn operated as basically a monopoly. Profits every single year, near-immunity to recessions, and they did not even need a sales team.

Here is the thing though. In the early 1950s, a competitive underwriting method called “carding” started eating into Sanborn’s business. After-tax profits dropped from over $500,000 annually in the late 1930s to under $100,000 by 1958. During one of the biggest economic booms in American history, this company’s core business was essentially dying.

The Hidden Treasure Nobody Saw

But while the map business was wilting, something interesting was happening on the balance sheet.

Starting in the early 1930s, Sanborn had been stuffing its retained earnings into an investment portfolio. The map business required almost no capital, so every extra dollar went into stocks and bonds. Over decades, that portfolio grew to about $2.5 million – roughly split between stocks and bonds.

Now here is where it gets wild. In 1938, when the Dow was around 100-120, Sanborn stock traded at $110 per share. The investment portfolio was worth about $20 per share. So the market was valuing the map business at $90 per share.

Fast forward to 1958. The Dow had climbed to around 550. Sanborn stock? It was trading at $45 per share. But the investment portfolio had grown to $65 per share.

Do the math. The market was valuing the map business at negative $20. Buyers were paying 70 cents on the dollar for the investment portfolio and getting the entire map business – a business with decades of irreplaceable data that would cost tens of millions to reproduce – thrown in for less than nothing.

Why the Stock Was So Cheap

How does a company end up priced like that? Bad governance, plain and simple.

Sanborn’s board had fourteen directors. Nine of them were big insurance industry executives who collectively held 46 shares out of 105,000 outstanding. That is 0.044%. These were wealthy people running major corporations, and the largest individual holding among them was ten shares. They did not care about the stock price because they had almost no skin in the game.

The investment portfolio was doing well enough that nobody felt pressure to fix the dying map business. Dividends got cut five times in eight years, but interestingly, nobody ever suggested cutting director fees or executive salaries.

Let me tell you, when insiders own almost nothing and the board is collecting fees while the business deteriorates, that is a neon sign flashing “misaligned incentives.”

Buffett the Activist

Buffett saw the opportunity and moved fast. When the son of a deceased Sanborn president got frustrated with the company’s direction, demanded the top job, got rejected, and resigned, Buffett swooped in and bought his mother’s block of about 15,000 shares.

He kept buying on the open market, eventually accumulating around 24,000 shares. Together with two other frustrated shareholder groups, they controlled about 46,000 shares – 44% of the company.

The plan was straightforward: separate the investment portfolio from the map business, give shareholders fair value for the securities, and then work on rebuilding the map operation.

The board fought it, of course. Boards that have been collecting paychecks while doing nothing rarely welcome change, especially from outsiders. But management actually supported Buffett’s plan. A consulting firm had already recommended something similar.

Rather than drag everyone through a proxy fight, Buffett engineered an elegant solution. About 72% of Sanborn’s stock was exchanged for portfolio securities at fair value. The map business kept over $1.25 million in bonds as a safety cushion, and a potential capital gains tax of over $1 million was eliminated. Remaining shareholders got higher earnings per share and an increased dividend.

The result? A 50% return for the partnership in just over two years, and everyone came out better.

What Sanborn Maps Teaches Us

Three things stand out. First, small and neglected companies can be goldmines. Sanborn had a market cap near $4.5 million – too small for institutional investors, which is exactly why it was so mispriced.

Second, watch insider ownership. When the people running a company own almost none of its stock, their interests diverge sharply from yours.

Third, margin of safety matters enormously. Buffett was buying $65 worth of publicly traded securities for $45. No fancy discounted cash flow model needed. The floor on intrinsic value was right there on the balance sheet.

American Express – Buying Quality in a Crisis

Now let me tell you about a very different Buffett investment. If Sanborn Maps was about finding hidden assets in a neglected company, American Express was about recognizing a great business being unfairly punished by the market.

This one started with salad oil. Yes, salad oil.

The Salad Oil Scandal

A company called Allied Crude Vegetable Oil figured out a creative scam. They needed bank loans and used their salad oil inventory as collateral. Knowing oil floats on water, they filled barrels mostly with water and put a thin layer of oil on top. When the bank inspector popped open a few barrels, everything looked fine.

The scale was absurd. Allied Crude got loans based on 1.8 billion pounds of soybean oil when they actually had only 110 million pounds – roughly sixteen times their actual inventory.

When the fraud was discovered, it sent shockwaves through Allied Crude’s creditors. And here is where American Express enters the picture – they were one of Allied Crude’s largest creditors.

But the situation was even worse than it looked. At the time, American Express operated as a “joint stock company,” a legal structure where financial liability extends to shareholders. If American Express could not cover its losses, creditors could go after the shareholders personally.

Every trust department in the country panicked. Shareholders dumped the stock. American Express dropped more than 40%.

Buffett Goes All In

Here is what separates Buffett from most investors. While everyone else was running for the exits, he deployed approximately 40% of the entire Buffett Partnership into American Express.

That is a massive concentration. Even by Buffett’s standards, putting 40% into a single stock during a full-blown scandal was extraordinary.

And here is what makes this investment so different from Sanborn Maps. At Sanborn, Buffett was buying assets for less than their liquidation value – classic “cigar butt” investing. With American Express, he was paying more than 2 times book value and 15 times net income. Not cheap by any traditional value metric. Buffett was paying up because he genuinely believed in the business.

What Buffett Saw That Others Missed

While the market was fixating on the salad oil losses, Buffett was looking at what American Express actually was as a business:

• Market dominance in payment processing. In 1964, their position was even stronger than it is today, before Visa and Mastercard became the juggernauts they are now.
• Brand power that was nearly impossible to replicate. The American Express card was a status symbol. People wanted to carry it.
• Premium pricing strategy that actually increased demand. Charging more created an aura of affluence around cardholders, which made more people want the card. That is a rare and powerful business dynamic.
• Strong management and a track record of consistent earnings growth before the scandal hit.

The salad oil scandal was a temporary problem. The brand, the network, the customer loyalty – those were permanent assets. Buffett understood that distinction when most of the market did not.

The Long-Term Payoff

Buffett’s original American Express shares were sold before the partnership wound down in 1969, generating significant profits. But he was not done with the company.

In the 1990s, he bought back in through Berkshire Hathaway for about $1.3 billion. That stake grew to roughly $12.7 billion – an approximately 875% return, amplified by decades of deferred capital gains taxes and zero transaction costs from holding. That is the power of buying a great business at a fair price and simply not selling.

What Modern Investors Can Learn

These two investments together tell a complete story about how to think about value.

Distinguish between permanent and temporary problems. Sanborn had a permanent problem – its core business was structurally declining. But hidden assets made it a bargain. American Express had a temporary problem that did not touch its core competitive advantages. Knowing the difference is one of the most valuable skills an investor can develop.

Act decisively. Buffett did not nibble at these positions. He went big on both. When the analysis is sound and the price is right, hesitation costs you money.

Governance matters. At Sanborn, absentee directors with no skin in the game let a business rot. At American Express, competent management navigated a crisis and came out stronger. Before you invest, look at who is running things and how much of their own wealth is on the line.

Buy great businesses on the operating table. Most investors buy when things look great and sell when things look terrible. Flip that instinct.

Time is your greatest asset. Buffett’s 875% return on American Express came from simply holding for decades. No trading, no timing – just patience and compound interest.

Key Takeaways

• Sanborn Maps was a classic “cigar butt” investment – Buffett bought $65 worth of securities for $45 per share, getting an entire map business for free
• Bad governance (directors owning 0.044% of shares) was the root cause of Sanborn’s undervaluation
• Buffett’s activist approach at Sanborn generated a 50% return in about two years while benefiting all stakeholders
• The American Express salad oil scandal was a temporary crisis that created a buying opportunity in a dominant franchise
• Buffett put 40% of his partnership into American Express – extraordinary concentration backed by extraordinary conviction
• American Express marked Buffett’s evolution from “fair businesses at great prices” toward “great businesses at fair prices”
• Berkshire Hathaway’s later American Express stake returned roughly 875% over decades, demonstrating the power of long-term holding
• The key skill: distinguishing between companies with permanent problems and great businesses experiencing temporary trouble