Reece Duca: fanatically reliant

Bob Casey: You talk about the fact that there are a very small number of really exceptional companies. What do you mean by that?

Reece Duca: I rely on a study from–I believe his name’s Hendrick Bessembinder from Arizona State University– and what he did is he looked at every single public company from 1926 to 2016. So he covered a 90 year period. There were a total of 26,000 companies. And of the 26,000 companies, 25 of the 26,000 companies produced returns that are T-bill returns or less. So in other words, there was only 1000 companies that could create excess returns above risk-free T-bills returns.

Now you look at public companies, and you realize that companies can come public and because there’s a lot of incentives in the market, from whoever the constituent is, that their shareholders, their private equity holders, the investment bankers, whatever, you bring the companies public, but how many of them are exceptional companies? How many of them–and the reality is, most of them end up falling into that bucket that Professor Kay said, That’s the gray bucket. That’s the bucket of which, essentially, it’s the efficient market bucket.

And so, there’s only a tiny number of exceptional companies. And you understand that there’s some very specific things that permit exceptional companies to be sustainable decade after decade after decade. And many, many of them have to do with getting to the point where your customers are fanatically reliant, whether it’s a consumer product or whether it’s a business product, but your customers are fanatically reliant on what you deliver to them. If it’s a consumer product, it’s somebody is hooked on Coke, and they’re gonna drink coke come hell or high water. If it’s a business product, it gets locked into the workflow of the business, it’s something that your customers are ecstatic about. And that just essentially codified to us that what we needed to do, if we were going to have concentrated positions, we basically had to have super, super high confidence. And you had to find exceptional companies.

source. I was up in Santa Barbara so naturally reading about the local investment titan.