An excellent, simple explanation on why buying wildly over-valued financial assets is locking in a bad investment for years to come. There is no free lunch. See Blowing Bubbles: QE and the iron laws:
Look across the room you’re in, and imagine there’s a $100 bill taped in the far upper corner, where the walls and ceiling meet. Imagine you’re handing over some amount of money today, in return for a claim on that $100 bill 12 years from now.
Drop your hand toward to the floor. If you pay $13.70 today for that future $100 cash flow, you can expect an 18% annual return on your investment over the next 12 years.
Raise your hand a little higher. If you pay $25.60 today for that future $100 cash flow, you can expect a 12% annual return on your investment over the next 12 years
Raise your hand just above chest-level. If you pay $39.60 today, you can expect an 8% annual return. Move your hand to the top of your head. If you pay $70.10 today, you can expect a 3% annual return. Raise your hand above your head. If you pay $78.90 today, you can expect a 2% annual return.
Now imagine jumping up and touching the ceiling with your hand. If you pay $100 today for that future $100 cash flow, you’ll earn nothing on your investment over the next 12 years.
The exercise you just did is the single most important thing to understand about long-term investing…
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