QUARTERLY LETTER

3rd Quarter 2017 — Investment Strategy Review

“The market does its thing on its own schedule. ”
                                          — Joel Tillinghast


The U.S. stock market continued its steady advance during the third quarter. This is one tough bull. Nothing seems able to stop it - not tweets, hurricanes, earthquakes, terrorism, nuclear brinkmanship, political dysfunction, social unrest, overvaluation, the prospect of Fed rate hikes, or more tweets. Like renowned investor Joel Tillinghast says above, the stock market “does its thing,” caring little for conventional expectation. The S&P 500 index finished the first nine months of 2017 with a gain of 12.5% and has gone 14 months without a 5% pullback and 19 months without a 10% correction. Furthermore, the rally which began in early 2009 has become one of the longest in history.

We could devote the entire letter to a discussion about the risky investment environment, but financial media is covering the subject in detail these days. Lately, many of Wall Street's brightest minds have gone public with their apprehension, so there is no need for us to pile on. Major declines tend to be caused by the combination of rising interest rates, euphoric investor psychology, and a recession looming in the background. All the worry may sustain the rally; however, the margin of safety is far from ideal.

The bull cycle's endurance can be traced to the massive amount of liquidity produced by central banks in response to the 2008 panic. This unprecedented stimulus, which involved the large-scale purchase of bonds and other securities attempted to bolster the global economy by forcing down borrowing costs and pumping up financial assets. The six central banks engaging in this quantitative easing strategy - the U.S. Federal Reserve, the European Central Bank, the Bank of England, the Bank of Japan, the Swiss National Bank, and Sweden's Riksbank - now hold $15 trillion in assets, four times greater than the pre-crisis level. $9 trillion of this horde is government bonds, which means one dollar in every five of the $46 trillion in outstanding debt owed by these nations is held by their central banks. No one is certain that it can ever be unwound, but the Fed will start the process in October. When the other five institutions begin their liquidations, it ought to disrupt the tranquil investment climate. We'll see…

In the meantime, we do not want to get sidetracked by macro forecasting. We always follow Warren Buffett's mantra that “in order to succeed you must first survive.” For Mercer Capital, this means investing only in assets that provide a margin of safety from a valuation perspective and not trying to predict the market's fickle personality. Our asset of choice is an equity investment in a terrific business.

Few people know that the founder of modern macroeconomics, John Maynard Keynes, was an active investor. In addition to his own portfolio, he managed the endowment for King's College at the University of Cambridge. When Keynes began investing in the 1920s, he used economic and monetary analysis to speculate in currencies and commodities, but was wiped out on several occasions, most notably at the onset of the Great Depression. He also failed using a momentum-driven trading strategy that rotated in and out of stocks. It was only after Keynes abandoned a big picture focus and invested patiently in the undervalued shares of companies with positive long-term fundamentals that he began producing stellar returns throughout the remainder of his life. What is the lesson here? Joel Tillinghast sums it up perfectly in his new book, Big Money Thinks Small, with the following comment: “If the greatest macroeconomist ever, with special access to information and policy makers, couldn't trade successfully on credit and business cycles, I don't know who could.”

During the final months of 2017 investors will be bombarded with forecasts from investment strategists and other talking heads about the market's future path. Our advice is to tune it out or at least hit the mute button. We instead will be searching for attractively priced, winning businesses operated by capable managements. Granted this is not an easy task at this stage of the game since most of the cheapest stocks now deserve to be. Nevertheless, there is no reason to abandon the hunt.

Thanks for your encouragement and support. Please call anytime.

9/30/17           Henry D. Mercer III

Index Return   12/31/16 9/30/17
S&P 500 +12.5% Fed-funds .50 - .75% 1.00 - 1.25%
    10 yr. T-note 2.45% 2.33%

* 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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