QUARTERLY LETTER

1st Quarter 2011 — Investment Strategy Review

“Money will always flow toward opportunity, and there is an abundance of that in America. Commentators today often talk of “great uncertainty.” But think back, for example, to December 6, 1941, October 18, 1987, and September 10, 2001. No matter how serene today may be, tomorrow is always uncertain.”
                                          — Warren E. Buffett


The U.S. stock market continued to rally during the first quarter despite a series of crises that during other times might have caused a steep decline. Headlines have been dominated by unrest in North Africa and the Middle East, sovereign debt downgrades in Europe, and the earthquake in Japan, but investors have reacted calmly. Cheap money is exerting an overriding influence. Many believe that the trend is upward as long as the Fed’s ultra loose monetary policy remains in force. After all, a stated objective of the central bank is higher equity prices. The S&P 500 index closed out the quarter with a gain of 5.4%. As discussed in our previous letter, odds favor the advance continuing throughout the year. 2011 is the third year of President Obama’s term and the U.S. stock market has not posted a loss during the third year of a term since 1939. Remember, there are no sure things on Wall Street, where the unexpected often happens. Besides, prediction is a futile game. Just look at the upsets in the NCAA men’s basketball championship. The experts look pretty silly. Likewise, history does not treat the forecasts of investment gurus kindly, which is why we spend little energy worrying about the market’s short-term direction.

A client recently kidded us about what we are going to use for material when Warren Buffett stops writing his annual letter to Berkshire Hathaway shareholders. It will not be easy, which makes it all the more important that we pay attention to his counsel while he is still on the job. Buffett has never pretended to know where the market is headed. As he mentions above, “tomorrow is always uncertain.” (The current Berkshire news about Dave Sokol is a prime example.) According to Buffett, successful investing requires an intellectual discipline that prevents the stock market’s meanderings from triggering emotional decisions. The best way to accomplish this is to focus on value. We continue to believe that the largest, highest quality U.S. companies represent excellent value in our uncertain world. Shares of these dominant businesses have underperformed during the current rally, and while this is frustrating, it enhances the long-term attraction.

One characteristic of a number of Mercer Capital’s equity holdings is the ability to boost dividends. The importance of dividends is often ignored, which leads us once again to the Oracle of Omaha. Here is what Buffett had to say in this year’s letter: “Companies we hold are likely to increase their dividends as well. Coca-Cola paid us $88 million in 1995, the year after we finished purchasing the stock. Every year since, Coke has increased its dividend. In 2011, we will almost certainly receive $376 million from Coke, up $24 million from last year. Within ten years, I would expect that $376 million to double. By the end of that period, I wouldn’t be surprised to see our share of Coke’s annual earnings exceed 100% of what we paid for the investment. Time is the friend of the wonderful business.

The same principle applies to all investors. For example, in the past ten years Exxon Mobil’s dividend has risen from $.91 per share to $1.74, Johnson & Johnson’s from $.70 to $2.11, Procter & Gamble’s from $.70 to $1.80, and Wal-Mart’s from $.27 to $1.21. These payouts have a special appeal in the current environment where the safest fixed-income securities yield little and inflation seems likely.

Thank you for your confidence and support. Please call anytime.

3/31/11           Henry D. Mercer III

Index 1st Qtr. Return (Y-T-D)   12/31/10 3/31/11
S&P 500 +5.4% Fed-funds0 - .25%0 - .25%
    10 yr. T-note 3.30% 3.45%
   Oil (W.T.I.) $91.38 $106.72

* 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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