QUARTERLY LETTER

Year End 2018 — Investment Strategy Review

“To buy when others are despondently selling and to sell when others are avidly buying requires the greatest fortitude and pays the ultimate rewards.”
                                          — Sir John Templeton


During nerve-wracking times, we often think about the legendary investor Sir John Templeton who made a fortune capitalizing upon the stock market’s manic-depressive nature. Success in life is often attributable to finding the right role models and there are none better than Templeton. He possessed a rare temperament that allowed him to excel in the turbulent world of investing while maintaining a kind, gracious, and deeply spiritual character. Sir John is perhaps investment history’s most noteworthy practitioner of a contrarian strategy and his words above provide timely wisdom. Templeton gained fame buying U.S. stocks during the darkest days of World War II and then purchasing shares in Japanese companies in the years following that nation’s defeat. Later in his life he sold short dot.com issues at the peak of the technology craze. If Sir John were alive today, he would be saddened by the absence of civility, but also taking advantage of the despondent selling.

2018 serves as a classic example of the stock market’s bipolar tendencies. On September 20, the S&P 500 index closed at a record high advancing 9.6% for the year. These giddy times then came to an abrupt end. No champagne corks are popping on Wall Street this holiday season. Traders are probably turning to the hard stuff. The fourth quarter will long be remembered for its vicious stock market collapse, not just in the U.S., but on many exchanges around the globe. At its closing low on Christmas Eve, the S&P 500 had plunged 19.8% from the peak and it concluded 2018 with an annual loss of 6.2%. Other indices such as the Nasdaq Composite, the Russell Small-Cap 2000, and the MSCI All-Country World have entered bear markets, which are defined by declines greater than 20%. Everyone is wondering what the heck happened?

The simple answer would be to respond that rate hikes by the Federal Reserve have triggered the damage. After all, since late 2015 the central bank has boosted the Fed funds rate nine times and stocks in the U.S. began to falter around the time of the 8th increase in late September and then implode after the 9th several weeks ago. The investment game’s most well-known axiom is, “Do Not Fight the Fed,” so the tighter monetary policy is an obvious factor. As we have noted in past letters, the nastiest bear markets tend to be caused by rising interest rates, euphoric investor sentiment, and an unforeseen recession looming in the background. We get nervous during selloffs when in an effort to calm things, politicians and economists emerge to comment that “the economy is strong.” These talking heads have been all over the media lately and the spin has not helped.

Investors have also been rattled by the Shakespearean drama in the White House, Congressional dysfunction (to put it politely), the ballooning budget deficit, escalating tariff threats, the data privacy controversy tarnishing the technology sector, and computer-driven algorithmic trading – just to hit the main lowlights. We find that it is unproductive to dwell on this stuff. Our job is to allocate capital rationally in a world gone mad, and as Templeton would advise, maintain the fortitude necessary to produce superior long-term investment performance. History illustrates that it is best to buy when the situation looks most desperate and the current environment is serving up the opportunity.

The steepness of December’s decline and the rapid shift of investor sentiment from greed to fear is indicative of a panic. In 2019, we plan to capitalize upon a fragile stock market in the short-term to accumulate shareholdings in dominant businesses for the long-term. No one knows where and when the final bottom will occur, but at such marked down prices we do not mind being early. If the situation gets rockier, please keep in mind the following advice from Seth Klarman, who has generated impressive returns adhering to Templeton’s contrarian philosophy. “The price recovery from a collapse can be very swift. Therefore, an investor should put money to work in the throes of a bear market, appreciating that things will likely get worse before they get better.”

Thanks for your encouragement and support. We hope that you have a happy, healthy, and prosperous New Year.

12/31/18           Henry D. Mercer III

Index Return (2018)   12/31/17 12/31/18
S&P 500 -6.2% Fed-funds Rate 1.25 - 1.50% 2.25 - 2.50%
    10 yr. T-note 2.41% 2.68%

* 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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