QUARTERLY LETTER

3rd Quarter 2018 — Investment Strategy Review

“I have better things to do than tweet. ”
                                          — Warren E. Buffett


We cannot think of a more appropriate quotation to describe our state of mind these days. Remaining rational in a world gone mad is not easy and those swept into the tweet parade are only contributing to the insanity. Like Warren Buffett, our responsibility is to maintain a long-term investment perspective, not to be jerked around by the news of the moment. This is not a direct criticism of tweeting, or it’s most news impacting practitioners, but rather an observation that successful investing requires an element of detachment from the daily noise. For us, tweeting would be counterproductive. Just ask Tesla’s Elon Musk about the difficulty it can cause.

Without question, things are out of whack, especially in Washington DC. It is as if we are watching a series on Netflix; however, this is a real-life House of Cards episode. Incredibly, the stock market remains unphased as it continues to advance. Trade hostility and mid-term election jitters are adding to the tension, but surging corporate earnings and still historically low interest rates are boosting equity prices. In terms of investor psychology, the rally has yet to generate widespread euphoria, a characteristic often a precursor to significant setbacks. In fact, the August cover of Fortune featured the following headline: “The End Is Near.” This is positive from a contrary standpoint.

There have been eleven bull markets - defined as a period without a selloff of 20% or more – since the end of World War II. The current uptrend has now become the longest lasting. Ten years ago, investors were panicking amidst the worst financial crisis of the modern era. From Lehman Brothers’ failure on September 15, 2008 to the bottom established on March 9, 2009, the S&P 500 dove 46%. Furthermore, at that low, the S&P 500 had collapsed 57% from the bull cycle peak on October 9, 2007. Few back then could have imagined the record high levels where U.S. stock indices are trading today. We have witnessed a classic example of why Buffett advises that “it pays to be greedy, when others are fearful.”

It also pays to stubbornly focus on the long-term, while evaluating the margin of safety. Individual investors must not lose sight of their personal needs and circumstances. The game is different for institutional investors whose main objective is performance relative to an index. If you are nearing retirement or in retirement, never compromise your quality of life. Avoid placing a priority on beating the S&P 500 unless you can truly afford to. Furthermore, Berkshire Hathaway provides Buffett with an advantage that few investors possess. The steady inflow of cash from insurance premiums delivers ready capital to deploy at all times, particularly during scary declines. As Berkshire Hathaway’s Vice Chairman Charlie Munger has observed, “To profit from courage, you must also have some cash on hand.”

The 10th anniversary of the 2008 meltdown has prompted an assessment of the emergency rescue operation engineered by the Federal Reserve. It definitely lifted the economy out of a severe recession, but a main beneficiary has been the stock market. Massive liquidity created by the central bank’s radical monetary policy has provided the fuel for a record-breaking rally. What became known as “quantitative easing,” a combination of slashing the Fed-funds rate to near zero and initiating large-scale purchases of treasury and mortgage securities essentially juiced not just stocks, but also a wide variety of asset classes such as bonds, private equity, and real estate. In addition, the liquidity effect has been evident in less conventional areas like artwork and even bitcoin. It is interesting to note that while there remains a decent level of skepticism about the stock market, speculative excesses are abundant in these other spots.

Asset owners have prospered. We are not sociologists, but the growing wealth inequality seems to be having a cultural impact. What this means for the long-term is uncertain, yet there is a gilded age element to it. A recent article about the college admissions process in The New York Times was titled “A Luxury College Tour Starts With a Private Jet.” It is a different world from a decade ago.

Now that the Fed is beginning to exit from its accommodative stance, much is being written about when the bull cycle will end. Truth is – no one knows. In the meantime, we will continue to invest capital mindful of intrinsic value and the margin of safety. Thank you, as always, for your encouragement and support.

9/30/18           Henry D. Mercer III

Index Return (Year-to-Date)   12/31/17 9/30/18
S&P 500 +9.0% Fed-funds Rate 1.25 - 1.50% 2.00 - 2.25%
    10 yr. T-note 2.41% 3.05%

* Please contact Mercer Capital Advisers, Inc. if there are any changes in your financial situation or your investment objectives or if you wish to add to or modify any restriction to the management of your account. Our current disclosure statement as set forth on Part II of our form ADV is available for your review upon request.

* Mercer Capital’s management fee is billed quarterly, in advance, based upon the market value of the assets on the last day of the previous quarter.

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