Investing II

I just had an revelation about the stock market. That I will disclose later. But first, let me establish that there are currently two philosophies of investing: in individual stocks, or in the market in general.

To confidently invest in individual stocks, you must know that they will go up more than other stocks. This knowledge can be gained by either information about the company's plans or about the data that those plans are contingent on. Investors who act based on knowledge of the company are call insider traders and are banned in all countries. Thus the only way to invest in individual stocks is based on knowledge which is publicly available.

But stock prices do not represent the current value of their company: they represent the expected value of their company. According to the weak-form market efficiency hypothesis, all publicly available information is already accounted for in the price of the stock. This would mean that every stock price accurately represents its expected value and there is no rational reason to buy one over another. Obviously people do, but on average over time their returns are the same.

But suppose this were false, and obvious general trends and societal influences could be used to determine the futures of individual stocks. What would this mean? It would mean that the average person was not smart enough, motivated enough, or informed enough to take advantage of this generally-available information. Given the number of geniuses and billionaires devoting their entire lives to studying the stock market, do I think I am smart enough to beat them at their own game, at less than 5 minutes per day? Most people would answer yes, but in good conscience I cannot.

People still buy stocks, and they are right to do so. Why? Because stocks, on average, have historically gone up. This is why I currently invest the overall market through index funds.

But I've been thinking; why does the stock market generally go up? It's a generational pyramid scheme! Why do people buy stocks? Because they will go up. Why will they go up? Because more people will want to buy them? Because there will be more people around in the future to want to buy them! We can be sure our kids will want to buy stocks because societal pressures and business/state policies (inflation) effectively force them to invest, at least for retirement funds if not for anything else. But obviously this all falls apart when the US population starts dropping, following that of other countries. The only chance left is to invest in fast-growing countries....