Reece Duca: The Manager Who Outperformed Buffett
Reece Duca’s long-term track record is nothing short of mastery. 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.
Early Life and Education
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. Although 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. “One of the most incredible gifts any student can ever have,” as he’s said himself.
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.
Founding the Investment Group of Santa Barbara (IGSB)
A couple of months before graduating 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 in 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, having confidence you understood the business opportunity of your investments; the industry; the strategy; 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.
A Diverse Leadership Background
Duca has a 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.
More Insights From One of His Only Public Interviews
As noted, Duca recently broke his usual public restraint by participating in a long-form interview with his former partner – current Tegus CFO Bob Casey. The sitdown provided rare insights into his thought process, experiences, and the principles that guide his investment decisions.
Here are some key takeaways from the interview:
Early Investment Success: Duca’s initial foray into investing began with a modest $2,000, which he grew to $7,000 by the time he entered Stanford Business School. At Stanford, he expanded his investment research, interacting with company CEOs and gaining first-hand insights. This proactive approach allowed him to grow his investment to $75,000 by graduation, forming the seed capital for his Montecito Fund that he later renamed to IGSB.
Empowering People: IGSB empowered new investors with immediate responsibilities and growth opportunities, exemplified by stories like those of Tim Bliss and Marc Stad:
When Bliss began his career at IGSB, Duca entrusted him with managing a $500,000 portfolio. This significant responsibility early in his career allowed him to rapidly rise within the firm, making Partner within just five years. He was an avid reader of Buffett’s philosophy, and began by investing in FedEx, William-Sonoma, Commodore Computers, and also in Toys “R” Us coming out of bankruptcy. In hindsight, his track record suggests that he knew what he was doing.
Similarly, Marc Stad was given a substantial bucket of money when he joined IGSB. He was tasked with managing a $1 million portfolio from the outset. Stad’s exceptional performance saw him rise quickly through the ranks, making Partner and taking charge of the firm’s Hong Kong office within five years. Stad went on to found Dragoneer in 2012, which has grown into a fund of approximately $25 billion.
Investing Approach: IGSB, seeded with Duca’s stock market proceeds, has never managed outside money, fostering true long-term views and investment flexibility. This autonomy has enabled them to maintain true long-term views and positions, as well as the flexibility to invest in areas aligning with their interests.
Initially, IGSB was more focused on public equities, but over time, there was a strategic shift towards venture capital and company-building. This evolution in their investment focus is indicative of their adaptability and commitment to exploring new and potentially lucrative investment avenues.
Location and Independence: IGSB’s base in Santa Barbara, unlike major financial hubs like New York or tech hubs like Silicon Valley, has according to Duca helped maintain an independent viewpoint and grounded approach, similar to Warren Buffett’s choice of setting up shop in Omaha.
Tight-Knit Team: Duca’s experiences allowed him to build strong relationships with individuals such as Tim and Terry Bliss, Bill Rauth, Michael Cooney, and Luise Phelps, who later became key partners at IGSB. This tight-knit group, bonded by shared experiences in schooling, family, and sports, underpinned the success of IGSB.
Judging by IGSB’s Linkedin page, the group is extremely lean and currently employs no more than twelve people. And interestingly, there’s zero analysts, something Duca explains by the authority each employee is given.
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:
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