And I actually happen to know. In the course of researching the investment industry, I had drinks with Myron S. Scholes and Robert C. Merton, who had just won the 1997 Nobel Prize in economics. They won the Nobel by creating a mathematical formula for pricing derivatives.¶ They’ve made a pile of money Sir Edmund Hillary couldn’t climb. And they are two of the smartest people in the world—the Nobel committee says so. I asked them what you should do with your money. (Actually, I asked them, “What I should do with my money” but . . .) They said the same thing: “Asymmetrical information.” You should trade on asymmetrical information. The commodities-selling ranchers counting their calves, the Burger King executives calculating their burgers—these are examples of asymmetrical information. When somebody in a market has (or thinks he has) information that the rest of the people in the market don’t have, that’s asymmetrical. There wouldn’t be much of a market otherwise. If everybody believed what everybody else believed, everybody would set the same price on everything. The middle-aged men on the stock-exchange floor could quit hollering and go have lunch. The Wall Street Journal would become The Wall Street Shopping Mall Giveaway. Asymmetrical information shouldn’t be confused with “inside information” because it’s exactly the same thing. Inside information is just the part of asymmetrical information that it happens to be illegal to use. If you’re a highly placed executive at Seagram and know about the upcoming Disney takeover and the new Scotch-and-Water Park, you can’t buy Disney stock in anticipation of the premium that Seagram is going to pay for Disney shares. But if you’re the janitor who empties the highly placed executive’s wastepaper basket, and you know that scotch tastes terrible with inner tubes in it and that drunk people in mouse suits are not to be trusted, you can do anything you want. The problem is, you aren’t either of those people. And neither am I. This is why we shouldn’t be investing in stocks. We should invest in mutual funds. Mutual funds have multitudes of ex-indie-filmmaker M.B.A.s searching out asymmetrical information. The problem is, there are too many M.B.A.s discovering the same asymmetrical information, which makes the information all symmetrical again. This is why we should invest in index funds. The problem is, index funds contain the same stocks that make up the Dow Jones Industrial Average or the like. Index funds will go where the stock market
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