Thursday, January 27, 2011

How Paul Samuelson Really Got Rich

It's not common knowledge in the economics profession, but the anti-gold, Keynesian economist, Paul Samuelson, made a bundle by being long gold in the late 1970's, through a commodities trading firm, Commodity Corp., that he was affiliated with. (Keynes also a gold hater, made a fortune on gold stocks after he urged FDR to prop up the price of gold).

David Warsh writes about Samuelson's involvement with Commodity Corp (though he doesn't mention their gold positions, which he would unlikely to be aware of) My emphasis:
It turns out that the great MIT economist was influential in the creation of one of the earliest and most influential hedge funds. Launched in 1970, Commodities Corp. blazed a trail of extremely high returns throughout the 1970s and early ’80s, before disappearing in various pieces into Bermuda mailboxes and Goldman Sachs. Many of its star traders – Bruce Kovner of Caxton and Paul Tudor Jones, chief among them—formed successful hedge funds of their own. Samuelson thus had a ringside seat at the birth of an influential industry that is still only poorly understood.

About the same time, he invested a substantial amount in shares of Warren Buffet’s Berkshire Hathaway Inc. It was in 1970, too, that he won the Nobel prize in economics, the second to be awarded. Long famous for the fortune that his pioneering textbook earned him after 1948, it turns out that Samuelson may have made more money as an investor than as an author. He was both smarter and richer than is generally understood...

In 1965, Samuelson published a version of the efficient-markets hypothesis — a world in which all reliably predictable events are priced right, and only surprises would remain; there would be no easy pickings on Wall Street. About the same time, Eugene Fama published his own formulation, and the idea that stock prices were properly described as a “random walk” – that it was all but impossible to outperform the market — was on its way to becoming firmly established.

Not that Samuelson himself took the finding literally. He later explained, “Experience makes me think that a few folk do have an intuitive flair for making money by sensing patterns of momentum.” Others, he said, are good at “figuring out which fundamentals are fundamental and which new data are worth paying high costs to get.”...

Someone proposed an experiment to Samuelson – Mallaby doesn’t say who – and the idea of Commodities Corp. was born. As one of two original venture investors, Samuelson put up $125,000 – real money back then.

The key figure was F. Helmut Weymar, whose prize-winning thesis on predicting cocoa prices Samuelson had supervised a couple of years before, along with MIT finance professor Paul Cootner. “I thought random walk was bullshit,” Weymar told Mallaby for More Money Than God. “The whole idea that an individual can’t make serious money with a competitive edge over the rest of the market is wacko.”...

By the end of the 1970s, Mallaby writes, Commodities Corp had become a prodigious success, its capital grown to $30 million, its profits in 1980 $42 million after $13 million in bonuses.
And there you have it. That's the story with a lot of these guys. Their academic nonsense says one thing, but their real world activities are quite different. In academia, Samuelson wrote about the efficiencies of the market and was anti-gold. In the real world, he sought out traders that could find the inefficiencies in the markets, and he owned gold.

A well-known econometrician, who knows my decidedly anti-econometric views, trades gold and calls me regularly for my views on gold. I wonder where Krugman has his money?


  1. As always, for the best demonstration of a person's true values, study HUMAN ACTION!

  2. I've always suspected there was a "connection" between Keynes as an "investor" and Keynes influence in economic policy. I've relished the idea of somebody, someday, writing a book proving the dirty "connection" existed. If somebody ever brought such a project to fruition, it might put the final nail in the coffin of Keynesianism.

  3. Good investment strategy: when the market turns left, you turn right.

    Better investment strategy: direct the markets left while you turn right.

  4. "direct the markets left while you turn right."

    The news was the French had won the war.
    Every one sold but the Rothschild where buying on that misinformation and panic and when the real news finally came that the British had won "bingo" a fortune had grown. Its been going on for a long time.