QUARTERLY LETTER

Year-End 2015 — Investment Strategy Review

“I don't believe all this nonsense about market timing. Just buy good value and when the market is ready, that value will be recognized. ”
                                          — Henry Singleton


The U.S. stock market went nowhere in 2015 as the S&P 500 index closed out the year with a decline of 0.7%. Investors spent most of the time anxiously monitoring economic data for clues as to when the Federal Reserve would begin raising interest rates. Confusion seemed to be the dominant sentiment and it was exacerbated by frequent public comments by central bank governors. The Fed finally boosted its benchmark funds rate in December from the zero percent level initiated during the financial panic. Clearly, the direction of the stock market will be influenced by the frequency and degree of additional rate hikes should they occur in the months ahead. Shares have also been weighed down by geopolitical tension, the bizarre presidential race, a fragile global economy, slumping commodity prices, volatile currency swings, and lackluster corporate earnings growth. The trendless U.S. stock market masked pronounced volatility among individual securities. Indices were supported by a narrow group of high flyers such as Amazon, Facebook, and Netflix, but the majority of stocks finished 2015 in the loss column. Wall Street's best and brightest had a rough year. Many superstar hedge fund managers posted dismal returns when their largest shareholdings collapsed. Few endeavors can be more humbling than investing.

Looking out into 2016, while the background appears challenging, we see opportunity. The bull cycle is aging, but investor psychology remains pessimistic. Major declines strike when greed becomes abundant and today's healthy level of fear is a positive indicator. Our job is not forecasting, but rather the disciplined investment of capital. We spend lots of our time searching for superior companies whose shares can be purchased at reasonable values. Keeping the focus on business quality and price enhances an equity investment's margin of safety. Financial media is always filled with market forecasts during the early New Year. When this occurs try to keep in mind Jason Zweig's humorous definition of forecasting which can be found in his terrific new book The Devil's Financial Dictionary. “Forecasting - The attempt to predict the unknowable by measuring the irrelevant; a task that, in one way or another, employs the most people on Wall Street.” We find it more profitable to avoid the chatter and remember the sensible advice of legendary investor Henry Singleton highlighted above. The ability to appraise value is the key to lasting investment success. If negative macro events cause the market to stumble in 2016, it will be critical to capitalize upon the fear that is generated. Singleton was a huge influence on another icon, Warren Buffett. Here is what Buffett wrote in an early letter to Berkshire Hathaway shareholders: “The most common cause of low prices is pessimism - some times pervasive, some times specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces.”

Thanks to the Fed's aggressive monetary policy, conventional asset allocation offers few alternatives outside of equities. Bonds, for example, do not yield near enough to provide worthwhile competition. As a result of this odd phenomenon, we have to be on our game in terms of stock selection. Diversification will not mask unforced errors. Lately our days have been spent reexamining the vital characteristics of a great business. Number one is a durable competitive advantage that will permit it to compound earnings growth well into the future. This analysis combined with an awareness that consumer preferences are shifting has led us to question the prospects of several core holdings. Like a baseball manager, winning here requires putting the best line-up on the field. We may decide to trade some veteran players in 2016, but only if it strengthens our investment roster.

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

12/31/15           Henry D. Mercer III

Index Return   12/31/14 12/31/15
S&P 500 -0.7% Fed-funds 0 - .25% 0 - .25%
DJIA -2.2% 10 yr. T-note 2.17% 2.27%
    Oil (W.T.I.) $53.27 $37.04

* 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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