QUARTERLY LETTER

1st Quarter 2016 — Investment Strategy Review

“If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes.”
                                          — Warren E. Buffett


The stock market can be susceptible to erratic mood swings and early 2016 serves as a classic example. After beginning the year with a selling panic, U.S. indices recovered quickly - so much so that the S&P 500 index finished the quarter with a gain of .8%.

Investor nerves were rattled right out of the gate when the Shanghai Composite plunged 6.9% on the first trading day of the year. The rout then spread around the world. A number of factors have been cited as the source of the anxiety: a weak global economy, growing talk that China would devalue the renminbi, crashing energy and commodity prices, widening credit spreads, falling earnings estimates, geopolitical stress, terrorism, the presidential election carnival, and a growing concern that all this might tip the U.S. into recession. At its mid-February low, the S&P 500 was down 10.5% for the year and 14.2% below May's record high. Believe it or not, the current market recovery is normal. History shows that it does not take long to recoup the losses sustained during corrections. As has been the pattern since the financial crisis, every time the market gets rattled, the Federal Reserve comes to the rescue. It is no coincidence that stocks began to advance immediately following Congressional testimony by Fed chair Yellen on February 10. During the hearing Yellen signaled caution on the path of future rate increases, citing market volatility as a potential risk to the economy. This is all the bulls needed to hear.

Today's choppiness can also be attributed to the tendency of hedge funds and other institutional players to pile into the same popular trades. Academics call the phenomenon “herding.” No one wins following conventional wisdom, but the investment game's big hitters succumb to basic animal instincts over and over again, providing a huge advantage to investors willing to ignore the crowd and think independently.

We do not want to get bogged down in the constant debate about global macro-economic trends. No one can forecast the future here with consistent accuracy. Our time is much better spent searching for value and allocating capital with an emphasis on margin of safety. As we have been saying for a while now, the debt market is extremely unattractive. Bonds make sense when they generate returns that are competitive with equities. It may be decades before this happens again.

The good news is that equities remain appealing. Bull cycles peak when speculation becomes extreme and sentiment euphoric, but the present situation is far from it. Pessimism, in fact, remains the prevailing emotion, which is astonishing given that stocks have been rallying for the past seven years. It would be a mistake to allow the depressing newspaper headlines to interfere with investment strategy. We plan to be an eager buyer should the correction resume later in the year. The stock market is the only place where merchandise is put on sale and the shoppers run for the exits. Overcoming this odd aspect of human nature is the key to investment success. One must also follow the advice of Warren Buffett, cited above, and truly commit capital for the long-term, not on a whim. Great investors such as Buffett tend to combine an innate optimism with common sense. In other words, it pays to maintain a bullish attitude, especially when fear is abundant.

One must also focus on the caliber of the business and take the stock market out of the equation. History's biggest fortunes have been generated by patiently owning meaningful stakes in dominant, well-managed companies. Don't forget, what works for Buffett works for regular folks too. The task is not easy, because quality ideas are rare. Very few businesses can maintain the value of its products or services and grow profits over the long haul. When you discover one, it is a huge mistake to let the meanderings of the stock market chase you away.

Thanks, as always, for your encouragement and support. Please call anytime.

3/31/16           Henry D. Mercer III

Index 1st Quarter Return   12/31/15 3/31/16
S&P 500 +0.8% Fed-funds .25 - .50% .25 - .50%
    10 yr. T-note 2.27% 1.78%
    Oil (W.T.I.) $37.04 $38.34

* 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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