"Fair value" is a funny thing.

Stocks have outperformed long-term government bonds by quite a lot over the past 100+ years. So much so that the wider-than-expected disparity is often referred to as the "equity premium puzzle." Humans being irrationally risk-averse tends to be the most common explanation.

But what if we're collectively wising up? Higher equity valuations now and in the future would do much to close that gap.

The notion that stocks might earn say 6% real annualized returns vs say 1% real annualized returns from long-term US treasury bonds over the long haul really does seem like too much of a "free lunch."

Unfortunately, this free lunch disappearing would lead to very much worse future equity returns than most are expecting. And that means the savings rate needed for a young person or couple starting out today to ever become financially independent is very much higher than most are expecting and perhaps completely unattainable for an uncomfortably high proportion of the population.

Berkshire Hathaway FAQ

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