QUARTERLY LETTER

1st Quarter 2021  — Investment Strategy Review

“You’re on a roll, kid. Enjoy it while it lasts, because it never does. ”
                                          — Lou Mannheim


2020 is certain to join memorable years such as 1907, 1914, 1929, 1987, 1999, and 2008 that will be forever associated with the boom-bust nature of the financial markets. It is not necessary for us to chronicle the wrenching impact of Covid-19, economic distress, social unrest, and the contentious Presidential election – just for starters. Not even Hollywood could create a believable scenario comparable to this year. At least we had streaming entertainment as a diversion, but the real drama was performed live.

During the first quarter of 2020, the S&P 500 index crashed 33.9% over a mere three weeks. To say that investors were fearful would be a vast understatement. The trend has been up ever since and in 2021 investors have become intoxicated by quick, easy winnings. Novice speculators are taking their stimulus checks and day-trading, many of them leveraged to the gills. Signs of excess are abundant – Archegos Capital’s margin call, the GameStop squeeze, “meme” stocks, Reddit’s WallStreetBets forum, the electric vehicle mania, ARK Funds, SPACs, bitcoin, nonfungible tokens, huh?

We can’t help thinking about the iconic line cited above from the film Wall Street, released in 1987. Lou Mannheim was the rational, seasoned stockbroker brilliantly played by Hal Holbrook. His warning to Bud Fox, an ambitious, greed-seduced stockbroker portrayed by Charlie Sheen, went unheeded and the rest is movie history. These days our conversations with millennial investors conclude with the sentiments of Lou. The concept of value is foreign to them. After all, why allocate capital for the long-term when you can double your money before Mom makes lunch. Like Bud Fox, they are destined to learn the hard way.

The following newspaper headlines illustrate the extreme shift in psychology from panic to exuberance:

March 2020

  • Rising Virus Fears Leave Trail of Wall Street Carnage
  • Markets Spiral as Globe Shudders Over Virus
  • Worst Rout for Wall Street Since 1987 Crash
  • Markets Plunge as Investors Fear Cataclysmic Recession
  • Wild Rush for Cash Rattles Markets

March 2021

  • ‘Stimmies’ Pay for Stock Plays Fueling Market
  • Popular Online Communities Push Stocks to Record Gains
  • The Growing Army of Amateur Investors
  • New Influencers Jolt Stock Market
  • Beware of Booming Penny Stocks

According to an often-quoted observation by legendary investor, John Templeton: “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” It is incredible that the current advance has experienced every stage of the lifecycle in only twelve months. No one knows when this will all end, because the manic highs tend to linger. Another dose of fiscal relief should reenergize the economy, but more importantly, the Federal Reserve has gone out of its way to indicate that there is no imminent threat of an interest rate hike. The flow of liquidity into financial assets will continue despite the high risk posed by the glut of speculation. Enjoy it while it lasts…

Lou Mannheim also delivered another memorable line when he said: “the main thing about money, Bud, is that it makes you do things you don’t want to do.” Mercer Capital will continue to invest the way we want to. This means shares of the highest quality businesses run by skilled managements and possessing durable competitive advantages. Great for us that some of them are attractive and few investors seem to care. Today, Bud Fox would be taking Blue Star Airlines public via a SPAC controlled by Gordon Gekko. No doubt, on a roll.

Thanks, as always, for your confidence and encouragement.

3/31/21           Henry D. Mercer III

Index 1st Qtr. Return
  12/31/20 3/31/21
S&P 500 +5.8% Fed-Funds Rate 0% - .25% 0 - .25%
    10 yr. T-note .91% 1.74%

* 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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