QUARTERLY LETTER

4th Quarter 2014 — Investment Strategy Review

“Everyone has a plan until he gets punched in the mouth.”
                                          — Mike Tyson


The U.S. stock market has rallied for the sixth consecutive year and traders on the floor of the New York Stock Exchange celebrated by donning “Dow 18,000” baseball caps. It is anyone's guess how long this winning streak can last, but the advance's primary drivers - low interest rates, abundant liquidity, and steady earnings growth - remain in force.

2014 was also packed with surprises, particularly the collapse of crude oil prices. This sharp decline in the energy sector contributed to a more volatile environment during the fourth quarter. Nevertheless, the S&P 500 still managed to close out the year with a gain of 11.4%.

Looking out into 2015, investors will continue to obsess over the Federal Reserve. Like performance enhancing drugs, the central bank's radical monetary policies have provided an extra boost for stocks. Quantitative easing has ended and a growing consensus believes that the Fed will begin to raise rates. Recent comments by Fed chair Janet Yellen have hinted that an increase is probable towards mid-year, but this is not a given. While the U.S. has recovered, the global economy is fragile, deflation is a looming threat, and tension between the East and West is high. The Fed will be hesitant to change course.

As discussed in previous letters, we believe that equities have entered a secular uptrend that will generate attractive returns for the remainder of the decade. Bear cycles are caused by tight money, excessive speculation, and recessions - none of which appear to be a danger today. This does not mean that there will not be nerve-rattling declines. It has been more than three years since the last 10% correction, so investors are way overdue for a test.

Investing is easy when the market is cooperating. Unfortunately, many lack the resolve to hang tough when the bear attacks. Just like “Iron Mike” Tyson says, “everyone has a plan until he gets punched in the mouth.” Investors should expect the stock market to deliver some hits in 2015; however, history illustrates that long-term bullishness has been rewarded. Success requires not allowing the occasional punch to knock you out of the game. We recently came across a study of U.S. stock market returns going back 190 years. What becomes clear is that devastating setbacks like 2008's are an outlier. Next time you feel panicky take comfort in the following statistics:

  • The stock market had 135 positive years and 55 negative years. It has been up 71% of the time.
  • 44% of the time, the stock market finished the year between 0% and +20%.
  • 60% of the time, the stock market finished the year between -10% and +20%.
  • Only 14% of the time (26 out of 190 years) did the stock market finish the year worse than -10%.
  • Only 5% of the time (1 in 20 years) did the stock market finish worse than -20%.
  • There is an 86% chance that the stock market finishes the year better than -10%.
  • There is a 95% chance that the stock market ends the year better than -20%.
  • The stock market was 5 times more likely to be up 20% or more in a year (50 out of 190) than down 20% or more in a year (9 out of 190).

Here at Mercer Capital, our conviction is reinforced by a value philosophy that emphasizes a margin of safety. We also pay close attention to investor psychology for signs of the extreme greed that often foreshadows the most punishing selloffs. As you know, we seek to invest in dominant businesses that will become more valuable over time. Our current challenge is finding bargains in a marketplace that has become pricey. In the meantime, we have been updating our shopping list of companies that we would love to own if there is a clearance sale in 2015.

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

12/31/14           Henry D. Mercer III

Index Return   12/31/13 12/31/14
S&P 500 +11.4% Fed-funds 0 - .25% 0 - .25%
DJIA +7.5% 10 yr. T-note 3.03% 2.17%
    Oil (W.T.I.) $98.42 $53.27

* 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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