Reece Duca: The Manager Who Outperformed Buffett

Reece Duca's long-term track record is nothing short of mastery, and he even outperformed no other than the legendary Warren Buffett. He's barely given any public insights into his remarkable career – until a recent interview with Tegus CFO Bob Casey. Starting with just $2,000 in his personal account, Duca turned this initial capital into multiple billions over the last five decades. His approach, characterized by managing a concentrated portfolio without external funding, fees, or bonuses, stands out in the finance world. Since few have heard about Duca, this article explores the strategies and philosophies behind his remarkable success.

Born and raised in Palo Alto, a stone's throw away from the technological heartbeat of Silicon Valley, Reece Duca grew up in an environment ripe with innovation and technology. This proximity to a hub of technological development undoubtedly influenced his early interest in business and investing.

His path to becoming an investor began at the University of California, Santa Barbara (UCSB), and he speaks about his college life as transformative. At UCSB, the only school he applied to, he came thinking that he was going to be an engineer. However, things turned quickly when he took an economics class led by professor Herb Kay. Kay, having a PhD from Stanford, had studied companies and business models that had started during the depression and managed to survive through World War 2 and the consumerism in the 1950s. Doing this, he identified resilient business models and attributes to look for in a good investment.

Having noticed Duca's brilliance in the class, Kay approached him after the term with an offer that would mark his entry into the investing business. He was appointed as Kay's research assistant, and according to Duca, he became not only that, but also his reader, his grader, and his personal investment researcher for the next three and a half years.

It’s clear that Kay played a great role in Duca becoming an investor. According to Duca, one of the most important interactions between them was on S-1s (the initial registration form for new securities that's required by the SEC for U.S.-based public companies). Kay would hand Duca two or three S-1s every other week and have him read them from cover to cover and come back with the right questions. They would then get on the phone with investment bankers and CEOs, talk to a couple of customers, and build their own investment case. Duca stated how this made his learning curve shoot through the roof. They had some success too, and Duca turned the initial $2,000 he had when arriving at UCSB to $7,000 in three and a half years.

After UCSB, Duca returned to Palo Alto to attend Stanford Business School. He initially didn't know how heavy the studying workload would be, but after term one, he figured there was additional time to focus on his personal investments. This led him to return to the framework set up by him and Kay at UCSB and apply it to the companies in the proximity of Stanford. He called bankers looking for companies that would likely file an S-1 in the coming year and started visiting the CEOs of these companies. This was key in growing his initial capital. And the $7,000 he started out with was turned into over $75,000 when he graduated, which he used to seed the Montecito Fund, the precursor to IGSB.

A couple of months before graduating from Stanford, Duca was invited to his faculty advisor's office to review job offers. During this meeting, Duca asked the professor what he thought of the idea of him just continuing to invest his own money. Something the professor thought was a big mistake.

Duca ended up following his gut, however, and crossed his most significant career milestones – founding the Investment Group of Santa Barbara (IGSB). During the first five years managing the firm, he turned his initial $75,000 to over $2 million, and the next five years, those $2 million to $7 million.

At this time, IGSB was improving on all fronts. Duca began seeing the symbiosis of looking at public companies with a financial lens, scanning through their annual and quarterly reports, and talking to management and customers. What they hadn't understood however was how the business model is at the center of all this; telling you how durable, sustainable, and competitively advantaged a company really is.

Through all this, IGSB always invested with a concentrated approach and often had over 70% of the portfolio in three to four companies. As Duca says, "If you wanted to focus on reducing risk, you diversified. If you wanted to focus on knowing your investments better than anyone else knew them and having confidence you understood the business opportunity of your investments; the industry; the strategy; and the tactics; you basically have a limited amount of time. [...] It became obvious to us that concentration was the key to returns."

Today, IGSB describe themselves as business builders. On top of their investments in public companies, they have started seeding and building businesses themselves, their most famous ones being AppFolio and Tegus.

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Duca has broad experience in different leadership roles, and among other things, he co-founded GlobalEnglish in 1997 and served as its Chairman until July 2012. The company quickly became a leading provider of cloud-based, on-demand English learning. At its height, GlobalEnglish served over 450 corporate customers, including 20% of all the Forbes Global 2000 companies like General Electric, HSBC, and Tata Consultancy Services. In 2012, GlobalEnglish was acquired by Pearson for a $90 million cash deal.

Duca was also involved with The Learning Company (TLC), another highlight of his career. He joined the board of directors of TLC and became its chairman in 1986. Under his leadership, IGSB became TLC's largest shareholder. This period was marked by significant growth for TLC, with revenues increasing at a compounded rate of 36% from $2.4 million to $53.2 million between 1985 and 1995. The company's profitability also saw a substantial increase, going from breakeven to a pre-tax margin of 20% during the same time frame.

TLC's continued success culminated in its public offering in 1992, an IPO led by Morgan Stanley and Robertson, Stephens & Co. From 1992 to 1995, TLC achieved 16 consecutive quarters of revenue and profit growth, a remarkable feat that underscored the effectiveness of its business. TLC's transformation from early struggles to a decade of outstanding performance has, not surprisingly, become the subject of case studies at prestigious institutions like Harvard and Stanford.

Then there's Advent Software, a leading provider of software and services for the global investment management industry, where Duca served as the Chairman of the Board. Founded in 1983, Advent Software went public in 1995 and was later acquired by SS&C in 2015 for $2.7 billion.

According to the article "A Legacy: The Sons of Stanford; The Men of Value Investing," by Tilson Funds, Bliss's success at the IGSB exemplifies the impact of resilience and mentorship. His partnership with Reece Duca started after graduating from Stanford's Graduate School of Business, with a net worth of negative $30,000 due to student loans. His financial turnaround at IGSB reflects his strategic investment mindset and the guiding influence of both Duca and their shared professor at Stanford, Jack McDonald.

Duca initially hired Bliss for a modest $2,000 per month, with the incentive of managing a €500,000 portfolio and the agreement that he would make 10% of the money he managed. However, Bliss faced early struggles as the market turned against him, dropping the portfolio value to $400,000 and bringing down his already low salary even lower. This could have been a career setback, but Duca provided a second chance, allowing Bliss to start over, and this time with a larger sum of capital to manage. From this new beginning, Bliss's skills in stock picking became evident, focusing on undervalued opportunities like Toys-R-Us, which was emerging from bankruptcy at the time.

Bliss's stock picks were remarkable successes, yielding consistent, substantial returns over several years. His investment strategy involved a blend of traditional and unconventional choices, including companies like Federal Express, Commodore Computers, and Williams-Sonoma. His track record suggests that he knew what he was doing.

Investment Track Record of Tim Bliss

Bliss's investment philosophy was, according to Tilson Funds, heavily influenced by Jack McDonald, who was renowned for his focus on value-based investing. McDonald often highlighted the importance of thorough fundamental analysis, and the long-term success of Warren Buffett, whose investing principles, such as the importance of patience, made a lasting impression on Bliss. Mcdonald's emphasis on studying the evolution of great investors, like Benjamin Graham and Buffett, helped Bliss develop a solid foundation in both the technical and qualitative aspects of investing.

Bliss's performance and investment returns at IGSB reflect his ability to take calculated risks, stay resilient during downturns, and seize opportunities in both public and private markets. His success, alongside Duca’s mentorship, highlights the importance of trust, autonomy, and a disciplined, value-driven approach to building wealth over time.

In conclusion, Reece Duca's extraordinary career showcases the power of disciplined, concentrated investing combined with a relentless focus on value creation. His ability to start with a modest sum and build it into billions without relying on external capital or chasing short-term gains showcases his unique approach. What truly sets him apart, however, is his focus on the long-term, both in his investments and in his relationships with partners like Tim Bliss. Duca's focus has never been solely on money; instead, it's been about building something lasting, collaborating with people he respects, and making a positive impact.

On an ending note, we'd like to share this incredible quote from Duca. It makes it clear what really matters and that money shouldn't be the driving force in everything we do:

• Further reading: The World's Most Famous Investors