The short answer is that hedge funds etc hire teams of math PhDs, rent out supercomputers, acquire non-public information like satellite imagery, and do various other hard activities in order to accurately price securities. Unless you think you can beat these players at this game, there's no way to pick better-than-average stocks.

The longer explanation is that you can break down the price effect of various real-world events into two axes. There are things that transfer market value between companies, and things that change the value of the market as a whole. For example, people buying more Macs instead of PCs will transfer market value from Microsoft (among others) to Apple. On the other hand, a novel form of efficient energy production will do more to increase overall economic activity.

The maximally market-cap weighted portfolio has diversified away the first axis of risk. Suppose company A, worth $500M, loses $50M of market cap to company B, worth $100M. If you own $500 of company A and $100 of company B, the $50 loss from owning company A stock is completely offset by owning $10 of company B stock. You're purely exposed to changes in the value of the economy as a whole, and have eliminated diversifiable risk from your portfolio.

If you can't benefit from taking on diversifiable risk, you're better off getting the same return at a lower level of risk by simply removing it.

I feel like a significant fault in the model you propose is that you're exposed to the value of the public market, not the economy.

Market cap lost to non-public companies will disappear from your portfolio.

That's a fair critique, but one that applies equally to other strategies for picking stocks of public companies, so is kind of out of scope.

Because you only know which stocks in hindsight.