QUARTERLY LETTER

1st Quarter 2014 — Investment Strategy Review

“Tumbling markets can be helpful to the true investor if he has cash available when prices get far out of line with values. A climate of fear is your friend when investing; a euphoric world is your enemy. ”
                                          — Warren E. Buffett


The U.S. stock market rally took a breather in early 2014, which is not surprising given last year’s large advance. Disturbing recent events ranging from a decelerating Chinese economy to Russia’s annexation of Crimea have rattled nerves, but all things considered, the major indices handled the turmoil well. The S&P 500, for example, finished the first quarter with a gain of 1.3%. Three weeks ago the bull cycle celebrated its fifth birthday. Anyone predicting this celebratory outcome during the panic of March 2009 would have been sent to the loony bin. The past five years is a perfect illustration of how investing rewards contrary thinking.

As mentioned in our previous letter, the stock market is overdue for a correction, but any such decline should be welcomed. While we believe equities have entered a secular uptrend that will generate attractive returns over the longer-term, this does not mean that the journey will be smooth. Corrections are normal; 2013’s uninterrupted surge was not. We expect that the Fed’s tapering process will cause confusion. Investors should also be aware that mid-term election years tend to experience selloffs during the first nine months. Forecasting is not our game and we would never make an investment based on a prediction about the market’s direction. Keeping the focus on value is essential. If the price of a security looks enriching, we’ll buy, no matter the level of the indices. A genuine challenge for Mercer Capital in the future will be maintaining a margin of safety in an environment where bonds, a traditional source of diversification, are risky. In terms of investment strategy, this means an even heavier reliance on equities.

A highlight of the first quarter was the release of Warren Buffett’s annual letter to Berkshire Hathaway shareholders. Buffett is an outlier among corporate leaders in that he clearly discusses the performance of Berkshire’s businesses, reporting both the positives and the negatives, especially his mistakes. He is a great teacher and we urge you to read the section entitled “Some Thoughts About Investing,” which is filled with classic Buffettisms. Here is a sampling of our favorites:

  • Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”
  • The fact that an asset has appreciated in the recent past is never a reason to buy it.
  • Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.
  • Forming macro opinions or listening to the macro predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important.

From time to time we are asked why a cash allocation is necessary, particularly since cash yields virtually nothing today. The Buffett quotation spotlighted at the beginning of this letter offers an explanation. Quite simply, cash is a strategic asset that becomes valuable when markets “tumble.” Therefore, we always want to make sure liquidity is available to scoop up value.

The bullish aspect of Buffett’s fame is that for as widely publicized his investment philosophy has become, very few have the discipline and temperament required to stick with it. For us it has become part of our DNA – as he would say it is a “competitive advantage.” Thank you for your encouragement and support. Please call anytime.

3/31/14           Henry D. Mercer III

Index 1st Qtr. Return   12/31/13 3/31/14
S&P 500 +1.3% Fed-funds 0 - .25% 0 - .25%
DJIA -0.7% 10 yr. T-note 3.03% 2.73%
    Oil (W.T.I.) $98.42 $101.58
    Copper $3.40 $3.06

* 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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