QUARTERLY LETTER

3rd Quarter 2014 — Investment Strategy Review

“Successful investing requires this crazy combination of gumption and patience, and then being ready to pounce when the opportunity presents itself, because in this world opportunities just don't last very long. ”
                                          — Charles T. Munger


History's greatest bull markets have been born during times of overwhelming pessimism and the current uptrend in the U.S. is a classic example. The major stock indices continued their record breaking advance during the third quarter, a positive outcome few investors believed possible during the terrifying financial panic of 2008. In a recent talk, Warren Buffett's sidekick, Charlie Munger, discussed why he and the Oracle of Omaha have been able to generate such incredible investment results. His comment above is a lesson for all. It takes gumption to buy when markets are collapsing and then patience, since the biggest gains require hanging on for the long-term. Munger, notorious for being blunt, also emphasized the importance of independent thinking when he said, “If you stay rational yourself, the stupidity of the world helps you.”

Today's stock market appears calm, but short-term risk is rising. The Fed is unwinding its monetary stimulus, which has been the primary fuel propelling the rally. Geopolitical unrest is spreading, valuation is becoming pricey, and new ideas are tough to discover for bargain hunters like us. Furthermore, the jubilation greeting the initial public offering of Alibaba is a troubling symptom of speculative euphoria. Let's hope that it does not become another illustration of the madness of crowds that fills financial history. There are other signs of bull cycle excess. High-end real estate in Manhattan is red-hot. A Park Avenue duplex was just purchased for a record $71.2 million by a hedge fund titan who already owns an adjacent apartment in the building. What a contrast to the desperation of 2008 when hedge fund managers were besieged with margin calls.

Mercer Capital's job is not forecasting, but the probability of a decline is increasing. It has been more than three years since the last 10% correction - the fourth longest stretch for the Dow Jones Industrial Average since 1929. As discussed in our last letter, the steady advance is unusual since corrections of at least 10% have occurred once every twelve months on average. Lately, the rally appears to be losing momentum, small-cap indices are showing losses for the year and more stocks have been hitting new 52-week lows than highs. Time will tell, but we sense that the longer the wait, the larger the selloff when it finally arrives.

Please do not misinterpret our near-term caution. A pullback will enhance Mercer Capital's ability to generate superior returns over the long run. This is why we have been maintaining a cash allocation. We want to keep plenty of liquidity available in order to scoop up bargains. For us, margin of safety is a key discipline and right now new investments meeting our standards are scarce. The solution here is cheaper prices, which a correction will provide. Again, we are not trying to forecast or time the direction of the market, which would qualify us for Charlie Munger's stupidity category. He, for example, has not bought a new equity holding in his personal account in more than two years, preferring to wait for a better opportunity. Let's just say we are “value timing.”

Like Buffett and Munger we are long-term bulls adhering to an investment philosophy that seeks to accumulate shareholdings in dominant businesses that possess durable competitive advantages. Nothing else generates lasting wealth like a meaningful equity stake in an enterprise sure to grow well into the future - just look at what happened at Berkshire Hathaway. The problem for investors is that there are few great companies with the ability to prosper for many years ahead, so it pays to be selective and the cheaper the price paid going in, the better the chance of success later on. Volatility is something to be welcomed, not feared.

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

9/30/14           Henry D. Mercer III

Index Return (Year-to-Date)   12/31/13 9/30/14
S&P 500 +6.7% Fed-funds 0 - .25% 0 - .25%
DJIA +2.8% 10 yr. T-note 3.03% 2.51%
    Oil (W.T.I.) $98.42 $91.16
    Euro $1.3745 $1.2631

* 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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