Lessons from Reece Duca

Takeaways from an interview with an investing legend

Yesterday Reece Duca gave a rare public interview. Reece is the founder of the Investment Group of Santa Barbara, an investment company that has been in business for over 54 years (it began when Reece graduated Stanford Business School and had $75k to invest and has never taken outside money) and invests in a concentrated portfolio of high quality businesses in both public and private markets. The interview is definitely worth a watch and I figured I’d share my takeaways here.

He talks about how important it is to be mentored by a great investor. His professor at UC Santa Barbara (who received a PhD from Stanford for their work on the business models of public companies in the post great depression era) took him on as a research assistant & had him reading S-1s and talking to CEOs of companies the professor was considering investing in. He joked that although he was technically a research assistant, he was essentially the professors investment analyst.

He stresses the importance of focusing on business model for understanding durability of the business. This is a recurring theme in his strategy and makes sense when you consider 1. how concentrated the IGSB portfolio is 2. his work for the UCSB professor who had done extensive work on business models and the companies that successfully navigated the era in the aftermath of the great depression.

He talks about how there's synergy between investing in public & private companies (something he did early in his career) when viewed through the lens of evaluating business models and trying to understand "is this an exceptional company?" & "what are some of barriers to competing with them?" Which are questions he’s always asking and doing lots of deep work in his effort to understand if the company clears the high bar to be included in the portfolio.

"If you wanted to focus on reducing risk, you diversified. if you wanted to focus on knowing your investments better than anyone else, you have a limited amount of time and thus need to focus on certain business models and certain companies" (The fund usually has 70-80% of assets in 3-4 companies which is certainly a highly concentrated strategy, but it's sort of more akin to thinking of portfolio construction as a collection of operating businesses and your company or portfolio is going to be the aggregate result of your stake in each one you own.)

"It’s hard to be an expert in 20 companies, it became obvious that concentration was going to be our key to returns" the pushback against this is that you take on unnecessary risk because if one company blows up it's a big hit but he never took outside money so that was an advantage and allowed him to focus on doing what he felt was best to generate returns. This has worked for Reece as the fund has been in business over 54 years.

He discusses the difference between being an investor & being in the investment business.

He never took outside money and talks about how the downside of not having outside capital was needing to pay expenses, salaries, taxes etc. all out of pocket but upside was being able to sculpt the strategy in what they felt was the best way to maximize returns (concentration

investing in both public & private companies etc.)

He realized a lot of outsider investors would not want the "risk" or volatility that comes with being so concentrated & investing in a mix of public & private but the way that Reece defines risk is "not knowing your companies" as opposed to not being diversified

How they've built a fund that's now in its 6th decade of operations. Reece talks about how there's lot of ways to make it work in investing business and how they refined what worked for them over the years.

By end of their 2nd decade in business they started to focus on software and eventually came to really focus on B2B vertical market SaaS.

They decided to take a concentrated approach to their private investments as well & wanted to own around 30% of the private businesses they backed. They also were willing to hold the company for a long time because they were so close to it, understood it and felt it was "de risked.” This is opposed to the portfolio strategy of traditional venture capital firms which may have 25-30 companies or more in one of their funds.

In fact, they would often buy shares at each round when the company was private, invest in the IPO & continue building their stake after the company went public (a recent example of this was their continued investment in AppFolio.)

They felt it was better to let money continue compounding in great companies that they knew well rather than sell somewhat arbitrarily after 10 years, have to pay taxes and then need to redeploy the capital.

There are only so many exceptional companies. He refers to a study done on companies from 1926-2016 that looked at 26,000 companies and only 1000 of them produced returns in excess of treasury bills

He describes the companies that are exceptional & stay that way for decades as having customers that are fanatically reliant on what you deliver to them, whether it's a consumer product or business product. He talks about they spend time talking to customers help understand the qualitative advantages the company has, especially in terms product market fit & go to market strategies.

“You’re in control of your own destiny.• Reece talks about how his father passed away when he was 14 & how much the time he spent with him during last his 6 months shaped his life.

He wants to do everything he can to keep everything as simple as possible. Most people needlessly add complexity to investing & to life. This is a core tenet of his philosophy. He also talks about the importance of mentors.

His goal was to wake up in the morning & love what he was doing and who he was working with more than it was ever about money. He spends a good portion of the year in Rome, where he is able to focus & read in peace.

His key metrics were "am I learning?" & "am I having fun?" and he figured if he could say yes to both of those that eyentually the IRR would take care of itself.

He talks about having a loving family, a simple life & amazing mentors and how they all helped him succeed. The interview is absolute gem and definitely worth a watch. I believe it’s one of if not his first public interview ever. There’s an incredible amount of wisdom in these 60 minutes and I’m happy he decided to share his thoughts with the world and think that any investor could take something valuable away from watching it.