Modern Finance Founder Merton Miller Dies

By Tracy Needham, Contributing Writer

When asked for a simple explanation of his theorum, Miller responded, "If you take money out of your left pocket and put it in your right pocket, you're no richer." When reporters were surprised that he received the Nobel for something so obvious, he quipped, "Yes, but remember, we proved it rigorously."

Economist Merton Miller, one of the founders of modern corporate finance and a Nobel Prize recipient, passed away on June 3 in Chicago. He was 77 years old.

Miller was a strong proponent of passive investing, believing that the market efficiently reflects all relevant information about a stock. Miller felt that since pertinent information is strewn all over the world, one person can only know a small fraction of it. He held that only the market can aggregate, evaluate and incorporate that information into securities prices.

Miller acknowledged that a small group of traders think they can beat the market using careful research to find significant non-public information. However, he also felt that the money they make as a group, on average, just covers the cost of their extensive research.

When someone questioned him about the long-term record of active investment managers such as Peter Lynch and Warren Buffet, Miller pointed out that it only takes "one big score" to become a hero, that this jackpot run will keep the manager's average high for a number of years. He said the only way to prove that someone has devised a foolproof method for picking stocks is for that person to teach it to others, and see if their pupils can make the same gains. If the students do not reproduce the returns, then the manager's success can't be ascribed to anything more than sheer luck.
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