What if you had the choice between two investments: both earning $100 per year, but one taxed at 30%, and the other at 20%? For which would you be willing to pay more?
What if investment A was otherwise identical to investment B, but had an upfront fee and significantly higher transaction costs than option B: Which would you rather own?
Would you be willing to pay more for the ease of having something delivered to your home versus dragging yourself out to a store and then hauling it back home? That is, does convenience justify a premium?
What if alternatives solutions to a problem were lacking: would you be willing to pay more to solve your need than you otherwise would?
Elevated valuations on the US stock market relative to its long-term history are often cited as reason for alarm—like picking up nickels in front of a steam roller according to a recent Yahoo Finance article. And it’s true that current valuations, using the cyclically adjust price-to-earnings ratio made famous by Nobel Laureate Robert Shiller, are above average—27.9 currently vs. the 1881 – 2016 average of 16.7. However, since 1990 we’ve spent 95% of the time above this 135-year average. Valuations do have some predictive power over long-term returns—it’s one reason we think it’s important to have a meaningful allocation to cheaper foreign developed and emerging markets stocks right now—but high valuations don’t necessarily mean we are due for a market crash.