The Great Salad Oil Swindle - Book Review

By Lorenzo Ayres

Norman C. Miller Category: Investing & Capital Allocation | Reviewed by Lorenzo Ayres

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Most people have never heard of The Great Salad Oil Swindle or the hustler from New Jersey at the center of it, Tino De Angelis, and that’s why I wanted to start this whole series here. If the point of reading is to know things other people don’t know, then you may as well begin with a book that is out of print, that almost nobody on your feed has cracked, and that quietly explains one of the greatest investments Warren Buffett ever made. I’d put it on the short list of the most useful business books I’ve ever read, precisely because it’s disguised as a crime story.

Here’s the setup, and I’m going to keep it clean because the mechanics are the whole lesson. In the early 1960s, Tino De Angelis ran a company called Allied Crude Vegetable Oil out of Bayonne, New Jersey, and he became, on paper, one of the largest holders of vegetable oil in the country. The way you borrow against a commodity is you put it in a tank, a warehousing company inspects the tank, and it issues a receipt that says, in effect, there is this much oil in here, and banks and brokers lend against that piece of paper. De Angelis figured out that the inspectors were checking the top of the tanks, and that oil floats on water, so he filled the tanks mostly with seawater and left a layer of oil on top. The receipts said hundreds of millions of dollars of salad oil. The tanks were mostly the Atlantic Ocean. He then used all of that phantom collateral to speculate in soybean oil futures, and when the futures moved against him in November of 1963, the entire structure came down in a matter of days, took two brokerage houses with it, and rattled the New York Stock Exchange in the same week the country was absorbing the Kennedy assassination.

Now here’s the part that turns a fraud story into an investing book. The warehousing subsidiary that had issued a lot of those phony receipts was owned by American Express. So American Express was suddenly on the hook for an enormous, undefined liability, nobody knew how big, and the stock got cut roughly in half. The market treated it as a solvency event. Buffett treated it as a very simple question, and this is the question I want every operator and every investor I know to ask: did the thing that scared everyone actually damage the business, or did it just damage the mood around the business.

Buffett went and looked. He literally sat in restaurants and watched whether people were still paying with the American Express card, he checked whether travelers were still buying traveler’s checks, he asked the businesses whether anybody was cancelling. And the answer was that the franchise was completely intact. The salad oil mess was a check that had to be written, painful, finite, and survivable, but the reason people carried an Amex card had nothing to do with a tank farm in Bayonne. So he put something like 40 percent of his partnership into American Express, one position, at the exact moment everyone else was running, and it became one of the defining trades of his early career.

I could stop there and it would already be worth the read, but I run an operating business, I’m in the middle of a refinance, and I’m building a structure where investors buy cabins, so let me tell you why this specific book has been on my mind.

The first lesson is about collateral you can’t see. Every lender who touched those receipts believed a piece of paper about an asset they didn’t independently verify, and the entire loss came from the gap between the receipt and the tank. When I sit across from a USDA lender for our refinance, I want the exact opposite of a salad oil tank. Our collateral is 400 acres of land, cabins you can walk into, a lodge, a pool complex, real recreation infrastructure, things an appraiser can put his hand on. That’s the whole point of my pitch. The book is one long argument for why you want to lend against, and borrow against, and buy, assets that can be inspected all the way to the bottom of the tank, not just at the surface where the oil is floating.

The second lesson is scuttlebutt, and it’s the one operators are actually best positioned to use. Buffett didn’t out-analyze Wall Street on American Express, he out-observed it. He went to the ground level and watched real behavior. I think about that constantly with the park, because I have something a spreadsheet doesn’t have, which is the ability to watch what guests actually do. Are they rebooking, are they bringing three families instead of one, are they buying the add-ons, are they staying the extra night? Occupancy and repeat behavior are my version of standing in the restaurant watching people reach for the card. The projections can say whatever they want. The tank tells the truth if you’re willing to climb up and look inside.

The third lesson, and this is the one I’d hang on a wall, is to learn to separate a scare from an impairment. A business will get hit with things that look terrifying and are actually just noise, a complaint, an inquiry, or a bad week of headlines. It will also get hit with things that quietly rot the franchise. The skill is telling them apart in real time, when the stock is down and everyone is telling you the sky is falling. American Express in 1963 was a scare dressed as an impairment. If you can train yourself, calmly ask whether the business’s reason to exist is still intact, you’ll buy when other people panic and you’ll stay calm when other people try to panic you.

The fourth lesson is concentration. Buffett didn’t sprinkle a little money at American Express to be safe, he sized it like he meant it, because his entire edge was that he had done the work to know the franchise was fine and almost nobody else had. That’s the trade every serious capital allocator eventually has to make peace with. Diversification protects you when you don’t know. Concentration is what you do when you do know. The difference between the two is the work you put in.

Who should read this? Anybody who lends money, anybody who borrows it, anybody who buys a business or a piece of one, and anybody who has ever watched a good company get punished for a headline and wondered whether that was a problem or an opportunity. It reads like a thriller, it’s short, it’s hard to find, and it’ll make you a more skeptical reader of collateral and a braver buyer of franchises. That’s a rare combination for an out-of-print paperback about salad oil.

If I had to compress The Great Salad Oil Swindle into one line for our team, it would be this: verify the tank all the way to the bottom, and when the market confuses a scare with an impairment, take the invitation.

About Lorenzo Ayres

Lorenzo Ayres is a business builder, dealmaker, and owner of America's Outdoor Adventure Park in Jay, Oklahoma. Here he reviews books on investing, deal structure, and business strategy.