QUARTERLY LETTER

1st Quarter 2015 — Investment Strategy Review

“Market forecasters will fill your ear but will never fill your wallet. ”
                                          — Warren E. Buffett


The U.S. bull market celebrated its sixth birthday in early March, placing it among history's longest. Investors have been spoiled by the rally's durability and minimal volatility. It has been more than three years since the last correction. Such a steady advance is unusual since setbacks of at least 10% have occurred once every twelve months on average. The investment climate is evolving, not all for the better, and U.S. stock indices made little headway during the first quarter.

A key factor altering the atmosphere is the diverging monetary policies of the Federal Reserve and the European Central Bank. While the Fed has terminated quantitative easing and signaled a willingness to begin raising interest rates, the ECB has been buying debt securities in an attempt to lower rates and stabilize Europe's economy. Thanks to the ECB, bond yields throughout much of the world have plunged. In fact, $3.6 trillion of government paper is trading at negative yields, meaning investors are paying borrowers to lend. This has created tremendous volatility among currencies and triggered a surge by the dollar.

Something is clearly out of whack. The strong greenback is hurting the earnings of U.S. corporations that conduct business overseas, some of which we own. Long-term prospects for these enterprises are bright, but the ride may be bumpy over the near-term. Nevertheless, we would welcome any weakness in share prices as an opportunity to add to holdings at better valuations. Sorry to bog you down with this overview; however, it is critical to understand that the current environment is abnormal. Negative interest rates are a symptom of deflation that tells us to be especially careful and disciplined.

Financial media has been bursting with predictions about where the markets are headed. We are going to steer clear of the noise and heed the warning about forecasters expressed above by Warren Buffett. Hard to believe, but it has been 50 years since the Oracle of Omaha took control of Berkshire Hathaway. Buffett marked the Golden Anniversary with a special letter to shareholders that included a priceless look at the company's past and future by both Buffett and his partner, Charlie Munger. We encourage you to read it. Buffett's extraordinary investment performance can be traced to his character, intelligence, and temperament. Bottom-line, he is a happy guy who rejoices in his work. Here are some other key elements contributing to Buffett's success:

  • Charlie Munger says that Buffett has “an almost inhuman patience.” He waits as long as it takes for the opportunity to purchase “wonderful businesses at fair prices.” These businesses must possess powerful brands and franchises that cannot be easily displaced, and also have rich profit margins. Most importantly, they must generate lots of cash.
  • For Buffett, quality in both businesses and people is essential. High-quality businesses are most likely to grow and compound cash flow. Conversely, low-quality businesses tend to corrode, which makes it difficult for even talented managements to produce value. Buffett seeks to partner with exceedingly capable people whose interests are attuned with his. This is a consistent pattern that began with Munger and continues now with Jorge Paulo Lemann of 3G Capital.
  • Be on guard for what Buffett calls the ABCs of business decay - arrogance, bureaucracy, and complacency.
  • Buffett avoids investing in fads and the hot stocks of the moment. He advised in his recent letter: “Never forget that 2 + 2 will always equal 4. And when someone tells you how old-fashioned that math is - zip up your wallet, take a vacation and come back in a few years to buy stocks at cheap prices.”

It is no secret that Mercer Capital's investment philosophy has been shaped by Buffett. Our goal is to maximize long-term performance and ignore short-term thinking. As Buffett often says, at any given point in time, the future is always uncertain. It is a mistake to obsess over today's macro risk. We are channeling our “inhuman patience” and are ready to buy superior value no matter the news on the front page of the paper.

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

3/31/15           Henry D. Mercer III

Index Return   12/31/14 3/31/15
S&P 500 +0.4% Fed-funds 0 - .25% 0 - .25%
DJIA -0.3% 10 yr. T-note 2.17% 1.93%
    Euro $1.2099 $1.0735
    Oil (W.T.I.) $53.27 $47.60

* 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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