QUARTERLY LETTER

4th Quarter 2011 — Investment Strategy Review

“Investors tend to move in herds, and things are rarely as bad, or as good, as the crowd believes.”
                                          — James Mackintosh


Investors were confronted with a wide array of risks throughout 2011, and the stormy atmosphere shows few signs of clearing soon. Here in the U.S., the stock market careened wildly, but the indices went nowhere. The S&P 500, for example, finished the year with a loss of .003%. This lackluster performance could have been much worse as international exchanges suffered severe declines.

Looking out into 2012, the problems ranging from geopolitical tension to a sputtering global economy seem overwhelming. The political rancor in Washington D.C. is likely to get even nastier during a presidential election year, so talk, not action, will remain the norm. Furthermore, the European Union’s hesitant approach to resolving its sovereign debt crisis is bound to keep investors on edge. Maintaining a long-term perspective is difficult in such an unsettled macro environment; however, today’s obstacles improve the odds for superior investment returns in the years ahead.

As discussed in recent letters, Mercer Capital is bullish about the future, especially the prospects for the highest quality equities. By now you must be getting tired of our saying this, but the best investment results are generated from shares purchased when fear is abundant. The current mood is truly pessimistic and it can be seen everywhere – evening news broadcasts, newspaper op-ed pages, and in protest movements such as Occupy Wall Street. Pension funds, famous for their poor sense of timing, have been trimming their equity allocations and individuals have been hitting stock mutual funds with heavy redemptions. Only tried and true value investors continue to believe in the merit of holding stocks for the long run. The observation above by Financial Times columnist James Mackintosh is right on target. Today the herd is fleeing the stock market, but things will not be as bad as the crowd fears. A decade from now, history is likely to show that this was a wonderful time to be buying equities. Investors need to realize that the U.S. stock market rotates between lengthy cycles of above-average and below-average performance. The S&P 500 index now trades at a level it first reached back in 1998. Investors have already experienced a drawn-out bear cycle. Probability favors that the next major move will be to the upside, even if we must wait a few more years for the turn.

The depressed stock market environment is allowing Mercer Capital to invest in the most dominant businesses at attractive prices. These enterprises possess durable competitive advantages that have withstood the test of time. Top quality companies tend to sell at big premiums to other issues. This has not been the case lately and the value discount is compelling. In a recent Barron’s interview, veteran portfolio manager Joe Rosenberg, who has worked for the famously contrarian Tisch family since 1973, said “I feel like a kid in a candy store. The best companies in the world are now some of the cheapest stocks.” Warren Buffett’s Berkshire Hathaway has purchased a sizeable stake in IBM which further validates our strategy. We have been researching both qualitatively and quantitatively the key characteristics of great businesses and compiling our “best of the best” list. Market volatility in 2012 will provide an opportunity to build positions.

Thank you, as always, for your encouragement and support. We hope that you have a healthy and prosperous New Year.

12/31/11           Henry D. Mercer III

Index Return (Y-T-D)   12/31/10 9/30/11
S&P 500 -10.0% Fed-funds0 - .25%0 - .25%
Shanghai Comp -21.7% 10 yr. T-note 3.30% 1.88%
Brazil (Bovespa) -18.1% Oil (W.T.I.) $91.38 $98.83
Germany (DAX) -14.7% Gold $1,421.10 $1,565.80

* 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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