QUARTERLY LETTER

2nd Quarter 2015 — Investment Strategy Review

“Investing is not a game where the 160 IQ guy beats the guy with the 130 IQ. Rationality is essential when others are making decisions based on short-term greed or fear. That is when the money is made. ”
                                          — Warren E. Buffett


The U.S. stock market has found it difficult to make headway during the first half of 2015. This is not a surprise considering the growing probability that the Federal Reserve will begin to raise interest rates later in the year. The attention of investors has also been sidetracked by the unfolding drama in Greece as well as abnormal volatility in the sovereign debt and currency markets, not to mention the wild trading action in China. Our main challenge today is discovering new investment opportunities that provide a reasonable margin of long-term safety. Six consecutive years of rallying stock prices has stretched valuation which makes things more difficult for disciplined buyers like us. Our job is not forecasting; we do not mean to imply that the stock market is on the verge of a sharp decline. That said, a correction would be welcomed, because it will enhance both value and returns later on.

Secular bull cycles are born amid fear and die amid greed. The most positive aspect underpinning the current advance is the high degree of pessimism. Yes, animal spirits are fueling plenty of mergers and acquisitions and sectors such as biotechnology are overheating, but overall, sentiment remains subdued. Right now, the prospect of interest rates rising off such a low base makes bonds a far more dangerous asset class than equities. Nothing appears to be too exotic for investors in their desperate quest for yield. Here is where the real speculative fever runs rampant. Mexico, for example, just offered a 100-year bond paying 4% in euros. Perfectly normal…

The future is always uncertain. Back in the late 1970s, when we entered the investment business no one could have imagined that the Soviet Union would collapse, China would emerge as an economic giant, Europe would form an economic union and adopt a common currency, Japan would get stuck in a multi-decade deflationary cycle, the internet would revolutionize civilization, terrorists would fly jumbo jets into the World Trade Center, the U.S. would unlock vast energy resources, the Fed-funds rate would be zero, sovereign credits would trade at negative yields, and the Dow Jones Industrial Average would climb from 750 to 18,000 despite wars, recessions, insider trading scandals, the 1987 crash, the tech bubble, the 2008financial crisis, and two vicious bear markets . No matter what forecasters are predicting today, the era ahead will be just as surprising.

Successful investing requires level-headed thinking and not allowing unexpected events (both good and bad) to impede long-term decision making. Warren Buffett's observation above describes how vital a rational perspective becomes when investors are overwhelmed by emotion. We view this skill as a competitive advantage. Buffett may be a genius, but it is his ability to focus when it counts that has made him an investing legend. Longevity also helps. $70 billion of Buffett's $73 billion fortune has been generated since his 60th birthday. While there is no need to discuss our ages, this certainly makes us optimistic about the years ahead.

The best way to control emotion, by the way, is investing in dominant businesses that can overcome the unexpected. It also helps to buy only when the valuation is attractive. The better the price, the better the margin of safety which helps calm the nerves. We have been extra careful during the first half holding more cash than normal. Our problem is price, not a scarcity of superior companies. At key points in the past this selectivity has hindered short-term performance and now may also be one of them. The shares of some of our core equity holdings have been lagging the indices in 2015, but this is understandable given that they are overdue for a pause. Even American Pharoah needs to rest every once in a while. We do not want to sell high-quality enterprises merely to juice short-term results.

Thank you for your encouragement and support. We hope you have a wonderful summer. Please call anytime.

6/30/15           Henry D. Mercer III

Index Return   12/31/14 6/30/15
S&P 500 +0.2% Fed-funds 0 - .25% 0 - .25%
DJIA -1.1% 10 yr. T-note 2.17% 2.33%
    Euro $1.2099 $1.1141
    Oil (W.T.I.) $53.27 $59.47

* 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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