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Not many people have heard of

Commodities Corp. But its erudite


traders managed to make money even
in December's disastrous markets.

Princeton's
Rich .
Commodity
Scholars
by SHAWN TULLY

On a sleepy country road in Princeton, and author of the all-time best-selling col- modities markets-one public fund went
New Jersey, a wooden shingle bears the lege textbook on economics. bust-Commodities Corp. cleaned up by
inscription "Commodities Corp." An old Despite the academic trappings, the selling short virtually across the board.
stone farmhouse turned office building, company is a model of bustling entre- Commodities Corp. is a rare breed, a
the corporate headquarters looks like an- preneurship. "Commodities Corp. barely cross between a cautious wholesaler and
other of the laboratories that cluster owns anything that can't be turned into a freewheeling speculator. The firrri has
around the college town. The secluded cash in a matter of hours," marvels Nor- big holdings in pork bellies (bacon), cat-
campus-like setting is well chosen. ton E. Smith, a consultant to the com- tle, and cocoa press cake, which will be
Commodities Corp., a privately held pany. "It's like a big pile of money." pulverized into cocoa powder, the key in-
commodity-trading company, is indeed a gredient of chocolate. Like Engelhard,
kind of think tank. And it is so secretive One of a rare breed Cargill, and other companies _that deal
that its managers have never granted the At the beginning of fiscal 1980, Com- in "physicals"-the actual goods-Com-
press an interview. modities Corp. had capital of $30 mil- modities Corp. locks in a profit by
Eight Ph.D.s are on the firrri's profes- lion, which it invested so successfully that contracting to sell its inventories of com-
sional staff of 40. Commodities Corp.'s re- profits from trading amounted to $42 mil- modities in a future month. Commodities
searchers sift through mounds of data on lion during the year. Even after shelling Corp. also gambles: it buys and sells fu-
every commodity from alcohol to zinc, out $13 million in bonuses for its 140 em- tures contracts for goods it doesn't have
and its traders are as nimble with the com- ployees, the tiny firm posted net income in inventory, something the other big
puter as most people are with a calcu- of $17 million for the fiscal year, which wholesalers swear they don't do.
lator. One of its founders-and still a ended March 31. That was more than the Only the most daring speculators can
board member and active counselor-is net income of 58 of the FORTUNE 500 rival Commodities Corp.'s track record.
Paul Samuelson, the Nobel Prize winner companies. In December, when many in- In fiscal 1980 it hoisted stockholders' eq-
Research associate: Lorraine Carson vestors took a beating in collapsing com- uity per share 114%. That beat the per-

94 FORTUNE Februa1
firm may penalize them by cutting off
their pay until they tum up in Princeton
again. Commodities Corp. rewards its
workers generously. Last year, the firm's
40 executives and traders each received
an average of $300,000 in bonuses in ad-
dition to salaries that average less than
$50,000. Secretaries got bonuses of as
This $15,000 satellite dish much as $3,000 apiece.
sits on the front lawn of The men who founded and still guide
Commodities Corp.'s rustic
headquarters in Princeton,
Commodities Corp. are an unusual com-
New Jersey, bringing in bination, intellectuals who admit to a
Reuters' worldwide hunger for making money. The president,
commodities service at the Helmut Weymar, 44, made his first foray
rate of 5.1 million bits of data into the commodities markets as an un-
per second (conventional
telephone lines can carry dergraduate at MIT, when he bought $10,-
only 4,800).Traders can call 000 worth of frozen orange-juice concen-
up the information instantly trate from a wholesaler. Six months later,
on video screens in their he sold out and doubled his money. The
offices-price quotations
from the major exchanges,
man who advised Weymar on the deal
business news affecting and lent him the money was Amos Hos-
commodities, and crop and tetter, the father of a childhood friend
weather data. Commodities and a legendary commodities trader for
Corp.'s headquarters started the brokerage firm of Hayden Stone.
out as a farmhouse; the
firm lavished $4.3 million The all-water diet
on improvements and
additions in 1980. Besides being an instinctive trader-he
deals in antiques in his spare time-Wey-
mar is a scholar wi~h a near obsession to
.formance of the 11 commodity-futures of traders. Though subject to a tough set learn all he can about commodities. His
mutual funds studied by the Norwood of financial controls, they are free to trade boyish good looks mask the intensity with
Index, a Chicago statistical service. At the any way they want, and to come and go which he attacks every project. He also
start of its 1981 fiscal year, Commodities as they please. The firm's credo seems to likes to experiment. He once went on an
Corp. was managing equity of $33.4 mil- be that any theory is good as long as it all-water diet for five days, and several
lion, more than any of these public funds. makes money. The atmosphere is as dub- years ago became fascinated by biofeed-
The Princeton firm has grown large by by and low-keyed as that of an Ivy League back. Attaching an electrode to his head,
paying only token dividends and pyra- university. Academic pedigree counts: in he watches his brain waves on a screen
miding retained earnings. The sharehold- a booklet the firm sends ·to stockholders and attempts to control them; one aim is
ers have hardly put up a dime above the as a supplement to the annual report, to speed up the learning process.
original seed money of $2.5 million they each executive's schooling is set forth At MIT in 1965, he completed his Ph.D.
chipped in in 1969. With that record be- in detail. One · typically well-educated thesis, an econometric model that fore-
hind it, Commodities Corp. has now trader, Andr~ Dudek, 33, is French, has a cast prices for one of the most volatile
teamed up with Paine Webber Jackson & B.A. in literature from the University of commodities, cocoa. One of his thesis ad-
Curtis to start a public commodities fund Tours, an M.A. and Ph.D. in archaeology visers was Paul Samuelson. Weymar then
called the Princeton Futures Fund. Paine from the Sorbonne, and an MBA from took a job advising Nabisco on how to
Webber, the general partner, set out to Northwestern. buy cocoa and other commodities. In
raise $23 million from limited partners In the office, traders wear casually prep- 1969, the model he had developed for his
who put up a minimum of $5,000 apiece, py blazers and· crew-neck sweaters. At thesis predicted a sharp rise in cocoa
and expects to sell out the issue by mid- times, they call in orders from the beach prices; Nabisco acted on the model's ad-
February. Commodities Corp. will make at Martinique or the ski slopes at Vail. If vice and reaped a huge inventory profit.
the investment decisions. they abuse tJ;leir freedom, and fail to show Heartened by his coup, and tired of the
Commodities Corp. is set up as a group up at the office for six months or .so, the three-hour-a-day commute by train be-

FORTUNE Fetxuaty9, 1981 95


The son of a brewmaster, Helmut Weymar, 44,
president of Commodities Corp., got started
in commodities as an MIT undergraduate. His
Ph.D. thesis, The Dynamics of the World Cocoa
Market, was published by MIT Press in 1968.

tween his home in Princeton and his of- better than the Land Rover. In 1970, its
fice in New York, Weymar set out to raise first year, Commodities Corp.· lost
capital for his own trading company. $100,000. At a board meeting, Weymar
Weymar assembled six traders who and Vannerson proposed diversifying by
provided a rich blend of talents in com- developing a technical trading system.
puter programming and scientific analysis Samuelson and Co0tner, firm adherents
of financial markets, particularly com- of the random-walk theory for commod-
modities. The group included Frank Van- ities as well as stocks, tried to discourage
nerson, an associate at Nabisco who had the idea. How a commodity's price
invented a model predicting wheat prices changed yesterday, they contended, tells
as a Princeton Ph.D. thesis; Paul Cootner, an investor nothing about how it will per-
an MIT finance professor and pioneer in form tomorrow.
developing the "random walk" theory of which one trader would present a paper,
stock prices, which says that changes in often filling a blackboard with mathemat- "Never mind the cheese"
price from day to day are unrelated to ical formulas predicting price changes .in Amos Hostetter sided with Weymar.
one another; and Weymar's mentor, his commodity. The trader Weymar affectionately referred
Amos Hostetter, who agreed to trade part- Commodities Corp.'s traders were then to as "our 70-year-old guru" was basi-
time for Commodities Corp. disciples of fundamental analysis. In cally a fundamentalist, but he also fol-
Weymar had hoped to raise $5 million, commodities, as in the stock market, lowed price patterns. Hostetter never
but his brainchild was so original that in- "fundamental" and "technical" analysis bucked a trend in prices for long, no mat-
vestors were wary, and he had to settle are the two major schools of investing. ter what the fundamentalists said. When
for half. The six would-be traders could The fundamentalist studies the eco- he decided that a market's supply-and-
come up with a total of only $50,000 nomic realities-supply-and-demand fac- demand prospects looked good, he put
themselves, but were allowed to keep up tors-that underlie market values. The up one-third of his ultimate position. If
to 40% of the equity, depending on how technician focuses on price and market- he lost 25% of that stake, he'd get out.
they performed. Weymar's old employer, volume information and examines past "Never mind the cheese," he'd crack, "let
Nabisco, purchased 12.5% for $500,000, trends in the belief that old patterns will me out of the trap."
and his old teacher, Samuelson, took 3.1 % repeat themselves, If the market swung his way, he'd add
for $125,000. Other investors included As a fundamentalist, Weymar fed the another third, taking a final position when
'United Brands and Tom Marsh, a Texas cocoa model he'd developed in his thesis prices had climbed half as high as he
natural-gas heir whose brother Stanley with a vast array of supply-and-demand thought they'd go. Commodities Corp.
owns a famous example of "earth art": an information. He compiled the history of paid Hostetter the tribute of computer-
"automobile graveyard" near Amarillo rainfall and humidity for the cocoa- izing the history of some of his old ac-
full of Cadillacs buried up to the wind- growing countries of Africa and correlated counts to examine how he'd "built a
shield. A last big chunk of cash-$1 it with the size of the harvest. That en- position" as prices shifted. These studies
million-came from Heizer Corp., the abled him to evaluate the maturing crops became informal guidelines for the firm's
Chicago venture-capital company. in the plantations of Ghana and Ivory other traders.
Coast before publication of government Hostetter himself learned Fortran, a
Formulas on a blackboard figures, which were often inaccurate any- computer language, so he could help out
Over the harsh two years that followed, way. Weymar hired his own cocoa-pod with programming, as he did for seven
1970 and 1971, Commodities Corp. counter, a German who ,toured African years until he died in a 1977 auto ac-
learned that brilliant traders and sophis- cocoa fields in a Land Rover, examining cident. "He was the most remarkable in-
ticated computer models aren't always the same cocoa trees several times dur- vestor I ever knew," says Samuelson. "He
enough to win the commodities game. ing the growing season and recording the made money in commodities 50 years
At first, the firm dealt in only a few com- number, length, and condition of the straight. The challenge was to make his
modities, followed a single trading phi- pods. Since a cocoa tree is as tall as an methods reproducible for others who
losophy, and had inadequate financial apple tree and contains about 25 pods, didn't have his flair or caliber."
controls. Most of the traders specialized the counter at times suffered from a stiff At Hostetter's urging, Weymar as-
in one commodity. Weymar handled co- neck. To make -matters worse, the Land signed Vannerson to set up a technical
coa, Vannerson wheat, Cootner pork bel- Rover broke down a lot. system known as "trend following." In
lies. They exchanged trading theories once Despite their thoroughness, the funda- its simplest form, trend following in-
a week during a three-hour seminar at mentalist traders didn't perform much structs a speculator to buy a commodity

96 FORTUNE February9, 1981 Portraits by Joan Berg Victor


whenever the price goes up, and sell it
when the price goes down. An investor
has to get in or out of the commodity
every time the price reverses, so that he's
constantly whipsawed by small losses.
The goal, of course, is to outstrip those
losses by catching a long upward or
downward move.
Vannerson aimed at a more sophisti-
cated trend-following system. To avoid
being whipsawed, he wanted to figure out
the pattern in which a price starts up or
down at the beginning of a real trend. He
computerized the daily prices of 15 com-
modities over at least ten years and found
that each commodity has its own "per-
sonality." In a volatile commodity such
as pork bellies, a sharp drop in price in a
single day signaled a decline of at least
two weeks, while goods such as com be-
gan a downward sweep by slipping grad-
ually over several days.
Vannerson's research produced a "tech-
nical computer system," or TCS-a trend- JACK DANIEL AND HIS NEPHEW, Lem
following scheme that, unlike fundamen-
tal analysis, doesn't predict where prices
Matlow, disagreed on most everything.
will eventually go, but signals when to Until it came to making whiskey.
hop in and out to catch short moves. Nat-
urally, the longer the trend, the better.
Commodities Corp. set up a TCS fund in
Mr. Jack (that's him on the left) was a fancy
1970 to trade 15 commodities, including
cocoa, copper, cotton, and soybeans.
dresser. So Lem refused to wear a tie! But they
At the time TCS was born, the fun- both insisted on mellowing their whiskey
damentalists still had control of most of
the trading capital, and in 1971 they had through huge vats of charcoal before aging.
heavy losses. In a ten-day period, the com
and wheat traders dropped $600,000. And we're about the only
Weymar's model, which had performed
so brilliantly at Nabisco, also backfired.
distillery who still does it
It was telling him that cocoa crops would that way today. You see, Mr. CHARCOAL
be small, and prices had to go up. Nev- MELLOWED
ertheless, prices plunged. Weymar lost al- Jack once said, nEvery day
most $400,000 over several months by
we make it, we'll make it '
6
sticking to his model. TCS saw the down- DROP
swing coming and sold cocoa. the best we can!' And nei- 6
Reining in the egos ther Lem nor anybody else BY DROP
In 1971, the six traders were down to
about $1 million in equity, less than half ever disagreed with that.
their original stake, and their ownership
of Commodities Corp. had dropped to Tennessee Whiskey• 90 Proof• Distilled and Bottled by Jack Daniel Distillery
10% because of poor performance. They Lem Motlow, Prop., Inc., Route l, Lynchburg (Pop. 361), Tennessee 37352
Placed in the National Register of Historic Places by the United States Government.
FORTUNE February 9, 1981 97
Paul Samuelson, 65, the distinguished MIT
economist, estimates the market value of Com-
modities Corp., of which he is a founder and
shareholder, at over $70 million. If he is right,
Samuelson has made at least $2 million in 11
years on an investment of $125,000.

decided that they needed failsafe controls coa over the next four years. He melded
to prevent a repeat of the cocoa disaster. the crop forecasts and other data into
Under the financial guidelines then in price estimates so precise that he made
force, the trading capital was in one big $10 million in trading profits between
pot, and the traders could dip into it as 1975 and 1978, the year he amassed a
they wanted. There was only one restric- spectacular $5.7 million before stepping
tion: the firm penalized the trader by down as a trader to become a full-time
charging high interest rates on his trad- manager.
ing funds if he added to an already large Although cocoa has been Commodities
and volatile position, and subsidized him Corp.'s biggest winner, the firm learned
with lower interest rates if he did the re- from the 1971 fiasco the benefits of di-
verse. A trader had to be brimming with - versification, adding new commodities to
confidence to plunge deeper into a tur- its portfolio each year. The diversification
bulent market. extends to trading styles. The firm has
Although the plan looked good on pa- a trader can put up very little money buck- lured a number of fundamental and tech-
per, it was unwieldy in practice. Com- ing a trend. TCS has become the trad- nical star traders away from the floors of
modities Corp. had to make sure it didn't ers' watchdog as well as a robotized the exchanges and from such firms as
drown with a trader who was positive he . commodities gambler. TCS's trading rec- Continental Grain, Louis Dreyfus, and
was right while the market was telling ord has won over even Samuelson. Today, Merrill Lynch. Most of the big guns are
him he was wrong. However brilliant, a in fact, the TCS fund manages some of "generalists," traders empowered to deal
trader could be misled by his model or his personal money. in a broad range of commodities. The gen-
his ego. The trick was to design a system eralists have done so well that last year
that granted the freedom to gamble and "Mortgage the house and buy" they were handling about $30 million,
experiment, but blocked mistakes from The early chastening and Hostetter's half the trading capital.
cutting too deep. tutelage gave the firm a balanced approach The TCS control function has kept loss-
Over the next few months, the trading to speculation. Traders searched out mar- es in check. In a single year, Commodities
team spent many late nights devising a kets where fundamental and technical Corp. has never lost over $1.2 million in
framework of controls that is still in use analysis pointed in the same direction. any one commodity, while gains in a sin-
today. It imposes two principal controls. They found that scenario many times in gle commodity have often topped $3 mil-
First, each trader is a profit center. At the the 1970s, when commodities prices start- lion. In its trading over the past six years,
beginnin.g of each fiscal year, he is hand- ed to move in the big waves traders TCS has done even better than the firm's
ed a "trading fund," based on his prior love. Commodities Corp. picked its first overall 47% pretax return on equity.
year's performance. The system grants the big winners in the late spring of 1972,
trader a free hand as long as he is mak- when Vannerson and the firm's com trad- Up against the limits
ing money, but it bears down on him if er saw what they called a "mortgage-the- Commodities Corp.'s biggest headache
he starts to slip. If he loses 50% of his ini- house-and-buy'' situation developing in comes from doing so well. Like the big
tial capital, he must sell off his position wheat and com. public commodities funds, its huge hold-
and take a month off from trading to write Since prices and market volume in both ings of some commodities butt up against
a memo to a management committee ex- commodities were low, they reckoned the position limits imposed by the ex-
plaining what went wrong. that a short dry spell could set off a buy- changes. As a result, it may have to start
The second control formalizes the sort ing frenzy. Besides, rumor had it that the putting more of its money into lower-
of guidelines Hostetter had been using Russian grain crop would be disastrously yielding commodities.
for decades. The control is tied to the sig- small. Vannerson and his colleagues took That move would slow Commodities
nals generated by the TCS system. If a a large position in com at $1.23 a bushel Corp.'s record-setting growth in equity
trader holds cocoa futures, for example, and in wheat at $1.47. They made a kill- per share, but Helmut Weymar doesn't
and TCS detects that prices are headed ing as massive Russian grain purchases seem worried. To him, business and the
downward, he is forced to get all but sent com prices hurtling to $3.50 and life of the mind go hand in hand. And in
10% of his capital out of cocoa. If he is wheat to $5.40 by mid-1973. 1981, come boom or come bust in the
authorized to trade several commodities Commodities Corp. also caught the commodities markets, he's going on a
in which TCS sees a downward trend, rampaging bull markets in soybeans and sabbatical leave to take courses in art his-
he has to get all but 20% of his' total cocoa. Starting in 1974, Weymar almost tory and political science at the University
funds out of those goods. In other words, flawlessly called every big move in co- of Sydney in Australia. ~

98 FORTUNE February 9, 1981

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