QUARTERLY LETTER

Year-End 2020 — Investment Strategy Review

“This time of year, there is always the ridiculous obsession over forecasts about where markets will be a year from now. Mr. Market is smart and sadistic, and he couldn’t care less about our calendar. In other words, I have no idea. ”
                                          — Barton Biggs


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.

As far as investing is concerned, it has been both the best and worst of all worlds. 2020 will be remembered for a vicious stock market crash and a record-smashing rally. Back in March the S&P 500 index dove 33.9% over a mere three weeks. Statistically, some aspects of the plunge were more severe than 1929 and 1987. Furthermore, the ensuing advance is unprecedented. Stocks have never recovered so rapidly to new high territory following a crash. The S&P 500 closed out 2020 with a gain of 16.3%. Who woulda thunk?

Credit for this financial magic act must go to the Federal Reserve. Thankfully the central bank studied the policy mistakes of the early 1930’s, which exacerbated the Great Depression. Today’s Fed did not dither. It quickly slashed benchmark interest rates to zero and injected massive doses of liquidity via aggressive purchases of U.S. Treasuries and mortgage-backed securities. Fed Chair Jay Powell also made it clear that rates would remain at the zero bound and the FOMC was “not even thinking about thinking about raising rates.” The stock market surged and has yet to look back. Investors owe the Federal Reserve a toast as they ring in the New Year.

As cited above by the cantankerous portfolio strategist, Barton Biggs, now is Wall Street’s prediction season. He believed this forecasting ritual was an exercise in futility. A recent study discovered that since 2000 the median Wall Street strategist forecast of the S&P 500’s return for the year-ahead missed its target by an average of 12.9%. “Wrong Way Corrigan’s” accuracy looks fantastic in comparison. Looking out into 2021, the consensus view appears to be a high single digit percentage gain for the S&P. Pundits are confident that the combination of Covid-19 vaccines, rock-bottom interest rates, and corporate earnings growth will sustain the uptrend. Time will tell…

Our job is not forecasting, but rather the allocation of capital. Influential investor, Ben Graham, liked to imagine that the stock market was a devious manic-depressive nicknamed Mr. Market. Biggs realized that Mr. Market’s volatile temperament made short-term outlooks useless. Long-term investors, however, could take advantage of the mood swings – selling during euphoric highs and buying during gloomy lows. The challenging aspect of this strategy is that these episodes at the extremes can linger for lengthy periods. Therefore, successful investing requires a keen appraisal of value and tons of patience.

The stock market is acting hyper-manic. This exuberance is most evident in the frenzy surrounding initial public offerings, blank-check companies, anything to do with electric vehicles, and bitcoin, for example. In addition, millennials are becoming addicted to day trading. Just look at the number of customers opening up accounts at tech savvy brokerages such as Robinhood. You can even place bets on fractional shares. How about $99 of Tesla?

Mercer Capital’s responsibility is to maintain a rational perspective. This demands a contrarian attitude and thick skin (or perhaps a thick skull). Our ideal investment is an equity stake in a high-quality business that can be acquired at a sensible price. Unfortunately, some of what is occurring now will be perceived as nonsense in the future.

One thing that we know for sure is that markets have a will of their own. The following observation by hedge-fund legend, Seth Klarman, is posted on my office bulletin board.

Money managers must keep firmly in mind that the only things they really can control are their investment philosophy, investment process, and the nature of their client base. Controlling your process is absolutely crucial to long-term investment success in any market environment.

Thank you for your ongoing trust in Mercer Capital’s process. We hope that you have a happy, healthy, and prosperous New Year. Here’s to better days ahead…

12/31/20           Henry D. Mercer III

Index 2020 Return
  12/31/19 12/31/20
S&P 500 +16.3% Fed-Funds Rate 1.50 - 1.75% 0 - .25%
    10 yr. T-note 1.92% .91%

* 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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