Henry Ellenbogen | Invest like the best Summary

1. Key Themes

The 1% Rule: Focusing on Compounding Valedictorians

Henry Ellenbogen's entire investment philosophy is built around a remarkable discovery: "Over a rolling 10 year period, you have about 40 stocks that compound well at 20% a year or go up a little bit over 6x. So about 1% of the stock market is the valedictorians. And that's what we want to go do." [00:06:26] This insight came from studying T. Rowe Price's New Horizons Fund over 50 years, where he realized "it was really only 20 stocks over 50 years that drove the performance." [00:04:22] The mathematical implication was stunning: the stake in Walmart, if not sold, "would have been greater than the sum total of everything that I was managing" at $8 billion. [00:05:25] Critically, "about 80% of those companies actually start their compounding journey as small cap companies," [00:07:15] which explains Durable's focus on this segment despite the volatility.

AI as Digital Kaizen: A 40-Year Opportunity Beyond Tech

Ellenbogen draws a profound parallel between physical and digital transformation: "For 40 years, because of China, we've been able to really lean out product-based businesses working capital, but in many ways I feel like we're just getting started on processes that are done by humans." [00:46:19] He believes every company with white-collar employees must understand their "AI cost" just like they had to understand their "China cost" in manufacturing. The example he provides is striking: Max Levchin at Affirm believes "affirm can grow at the rates that's growing at for a reasonable period of time. In addition, they can do it without adding headcount" [00:43:51] by using AI to lean out legal and compliance processes. Most importantly, Ellenbogen sees the biggest opportunity not in pure tech plays but in "existing diversified companies outside of the technology space" [00:10:20] that can leverage AI to create permanent competitive advantages.

The "And" Business Philosophy: Growth, Profitability, and Innovation

A recurring theme is that great companies must excel simultaneously across multiple dimensions. "To run a company well, you have to be in the and business, not the or business. You have to drive growth measured by market share in the short term. You have to drive innovation, or allocate capital well to position yourself better for the future. And you have to drive profitability." [00:00:00] This framework guided Durable's 2022 intervention with portfolio companies like Duolingo and Toast during the transition from zero interest rates. Ellenbogen's research showed that "if you're a small company, you don't have to be gap profitable and you don't even have to have an ROI that is above your cost of capital. But you do have to show progress in your path towards it." [01:13:17] The philosophy rejects the false choice between growth and discipline that characterized the zero-rate environment.

2. Contrarian Perspectives

Most "Durable" Businesses Are Actually Vulnerable to Technological Disruption

When studying media at T. Rowe Price, Ellenbogen discovered that companies like "Comcast, Time Warner, Disney, Viacom" [00:47:44] appeared to have durable competitive advantages but were "predicated on a closed system" [00:51:21] that broadband infrastructure would eventually break. His memo concluded "the riskiest thing is to own the durable asset. And the safest thing to do is go by the next standard." [01:21:14] This directly challenges the conventional wisdom about moats. Today, he applies this thinking to robotics: "If in many areas robotics is at parity... and the cost on the existing use cases probably don't go down at 3 to 5%... It probably goes down at more like 15 to 20%" [00:59:44], creating a scenario where companies on the wrong cost curve will be "probably 2 to 3 years behind and every day that they wait, they're probably getting further behind." [01:00:48]

Being Public Is a Competitive Advantage, Not a Disadvantage

Contrary to the current Silicon Valley zeitgeist celebrating permanent private status, Ellenbogen argues: "I believe the path to building a compounder or even what some people would say a generational company through the public markets is proven." [00:00:17] His Netflix example is instructive: when the stock fell from $280 to $70 (and later to the $50s) during the streaming transition, the market pressure "sent a signal to Netflix that actually you're under a real transition here" [01:43:22] and "allowed Reed to basically align external and internal investments, and actually get his entire senior team aligned on what they needed to do, but also really aligned on incentives." [01:44:09] The "positive value of daily marks and the depth of public markets" [01:45:15] forces the growth-profitability-innovation balance earlier, when cultural adaptation is still possible rather than after "corporate culture has already formed... at a certain scale, it's hard to change." [01:45:40]

The Short-Term Alpha Game Belongs to Machines, Creating Long-Term Opportunity

Ellenbogen studied quantitative funds deeply and concluded "if it's a repeat actor problem based on known data, actually the quants are pretty good." [00:33:34] But this realization led him to double down rather than retreat: "what we have said is what do they do and what is the limitation and one of the limitations is if you work at a firm that deeply measures your risk every day... you can't have a time horizon longer than your career horizon." [00:35:31] He estimates "somewhere between 80 and 90% of the institutional flow is basically driven either by the firms that have one month or three month of agency or the quants" [00:36:52], which explains why "the last public market earning season... was more volatile than any earnings season since the financial crisis." [00:36:05] This creates opportunity for patient capital: "Let's go do less. So we can do more." [00:37:01]

Hire Only People Who Could Run the Firm, Even at Entry Level

Most firms hire for immediate needs; Durable hires only potential future leaders. "If we go hire someone on the investment team, we want to go hire someone who one day could be a senior partner, or one day go basically manage a capital base... We're looking for people who can be as good as I am or Nukes or Cori or Catherine." [01:33:38] This is extraordinarily restrictive—"we just don't have that many slots" [01:34:26]—but prevents the institutional decay Ellenbogen observed in his study of investment firms. His partner Anuradha "started working with me at 26... she had never worked in the investment business before." [00:52:48] Corey "started working with me either 21 or 22 right out of William and Mary." [00:53:06] The philosophy: better to have fewer exceptional people developing over decades than to compromise on hiring.

3. Companies Identified

Duolingo

Description: Language learning and educational app platform, with over a million DAUs on newer products like chess
Why mentioned: Exemplar of early-stage growth company navigating AI opportunity and risk; demonstrates proper path to profitability
Quotes: "Luis reminds me of Toby from Shopify. The last time I spent time with someone that technologically strong... was when I spent time with Toby when Shopify was private." [00:15:26] "He's publicly said he developed chess... First, it was two people for six months, and then he added another four people and he developed a product in nine months. That's the best product he's ever done... how long would it have taken the past? It's like, I don't know. I probably need four to six x as many people and it would have taken them four times as long." [00:54:59]

Affirm

Description: Fintech company providing transparent consumer credit with "no tricks"
Why mentioned: Example of AI enabling massive operational efficiency without headcount growth; led by Max Levchin (act-two entrepreneur)
Quotes: "He's got great belief that affirm can grow at the rates that's growing at for a reasonable period of time. In addition, they can do it without adding headcount. And the reason for that obviously is he's going to go lean out a lot of processes that were not possible to go do before AI." [00:43:51] "I have this team that goes around the company and understands processes. And so I start from not a cost standpoint, but we start from a leaning out standpoint." [00:44:26]

Workday

Description: Cloud-based HR systems of record
Why mentioned: Classic example of act-two team (Aneel Bhusri and Dave Duffield from PeopleSoft) successfully leveraging cloud
Quotes: "The two co founders of work day, Aneel Bhusri and Dave Duffield had basically been the people who had pioneered HR systems of record in the previous client server world... they had felt they had it frankly completed their vision" after Oracle's takeover. [00:17:17] "What I did understand was this was an act two team. There's a bunch of the stuff you have to build into the product that for lack of a word is exception management... because this was an act two team, they actually knew how to leverage the modern technology." [00:18:19]

Domino's Pizza

Description: National pizza chain that leveraged technology for convenience
Why mentioned: Best-performing Russell 2000 growth company of the 2010s despite being "good to great" not pure tech; example of physical business winning through digital
Quotes: "What was the best Russell 2000 growth... Small cap company over that 10 year period in the 2010s. Well, actually, it was Domino's pizza, which was a modest growth company. It didn't average 10% growth over the period time." [00:11:03] "What they realize is if we really, really invest in technology, we can make convenience a lot better... they could then target that customer more efficiently... and now you have a direct relationship with those customers." [00:12:38]

CBRE (Jones Lang LaSalle reference as "Colliers")

Description: Real estate services and asset management firm
Why mentioned: Example of "soft moats" through exceptional capital allocation and human capital culture; led by Jay Hennick
Quotes: "What's misunderstood about Jay, and he's done this time and time again, is because of his understanding... his understanding of local incentives and sharpness of capital allocation... he's built an incredible business both in asset management on the real estate" [00:30:09] "If you really have studied Jay and you truly understand his human capital culture and how he basically attracts and holds people accountable and his ability to basically decentralize incentives... It's super impressive." [01:05:01]

DoorDash

Description: Food delivery platform
Why mentioned: Part of Durable's "millennial commerce" thesis; example of persistence from private through public markets
Quotes: "Among our largest positions in the public markets are door dash, affirm, toast, we led those last private rounds, right? And so, yeah, they persisted and we kind of bought more." [00:29:19]

Figma

Description: Collaborative design platform
Why mentioned: Example of Durable's approach of same analyst covering company from $30M private through public market
Quotes: "My partner, Catherine, who when we first underwrote Figma in 2020... is the same person who basically was at the all hands meeting with Figma when Dylan announced to the company that they were going public and is still the person that basically looks at the company when they announce our public earnings." [00:23:57]

4. People Identified

Jack Laporte

Description: Henry Ellenbogen's mentor at T. Rowe Price
Why mentioned: Foundational influence on Ellenbogen's investment philosophy; exemplar of long-term small-cap growth investing
Quotes: "The guy who became my mentor, Jack Laporte, this is what he believed, right? He believed that you invested in small companies, run by people who thought like owners, they woke up every day to make themselves better, they gave their employees a good deal, they had good cultures, they allocated capital well, this is what created companies that could grow and sustain." [00:03:14]

Luis von Ahn

Description: CEO of Duolingo, former head of AI and ML at Carnegie Mellon
Why mentioned: Technical excellence combined with business clarity; "purpose built for AI"
Quotes: "Luis reminds me of Toby from Shopify. The last time I spent time with someone that technologically strong, right. Luis had been head of AI and ML at Carnegie Mellon, but also has that much business clarity and is so crystal clear at communicating that he can make complex topics simple that even I can understand them was when I spent time with Toby when Shopify was private." [00:15:26]

Max Levchin

Description: Co-founder of PayPal, founder/CEO of Affirm
Why mentioned: Exemplary act-two entrepreneur; exceptional resilience and technical understanding
Quotes: "Max, to me, represents, you know, the best of an act to entrepreneur... he truly understands technology. And he really understands how it can be used in very complex systems to solve problems. He can recruit exceptional people because he speaks their language. He's also very good leader and people believe in him. He's also exceptionally resilient." [00:20:38] "I used to joke, Max, I'm like the only investor in Max, who hasn't made a lot of money... but with all jokes aside, Max, to me, represents, you know, the best of an act to entrepreneur." [00:20:13]

Reed Hastings

Description: Founder/CEO of Netflix
Why mentioned: Example of entrepreneur successfully navigating major transition with public market discipline
Quotes: "To reads credit. He realized that streaming was the future and he wanted to tackle this offensively... he said, Henry, I have not thought about this as much as I should. Let's talk tomorrow. I'll get the CFO on the phone. You go through your scenario. We'll go through ours. And I can learn." [01:42:24]

Mitch Rales

Description: Co-founder of Danaher Corporation, pioneer of Kaizen in US
Why mentioned: Represents 40-year track record of operational excellence through process improvement; "godfather" of lean manufacturing in US
Quotes: "For 40 years, because of China, we've been able to really lean out product-based businesses working capital, but in many ways I feel like we're just getting started on processes that are done by humans" - in context of visiting Mitch. [00:46:19] "The chairman of has been doing this for 40 years... they basically brought Kaizan back to the US" [00:45:14]

Jay Hennick

Description: Founder/Chairman of Colliers/FirstService
Why mentioned: Master of capital allocation and decentralized incentive structures; built multiple businesses through disciplined M&A
Quotes: "What's misunderstood about Jay, and he's done this time and time again, is because of his understanding he was really a disciple and his mentor was Peter Drucker, his understanding of local incentives and sharpness of capital allocation... he's built an incredible business." [00:30:09]

Steve Kerr

Description: Head coach of Golden State Warriors
Why mentioned: Leadership philosophy aligned with Durable's culture: excellence through joy, mindfulness, and deep understanding of people
Quotes: "If you're going to be a new warrior, he's going to actually go visit you in your hometown to truly understand who you are as a person. Right? And I mean, that to me is great. And that's, that to me, is part of what being durable is." [00:51:50]

5. Operating Insights

The Three-Year Look-Back Process for Investment Accountability

Durable implements a rigorous review system that most firms avoid: "Every single investment at durable, if we own for three years, we actually do a three year look back on what we underwrote and what it did." [01:08:28] The preparation is deliberately simple—"two sides"—stating what they thought would happen and what actually happened. The insight: "If something deviates a little bit for 12 straight quarters, actually, it's kind of staring you in the face." [01:10:04] This prevents the natural human tendency to excuse quarterly deviations. The culture is critical: "We don't do any of this in the spirit of, you made a mistake... It's like, no, we should be intellectually honest, just like we want our executives to be." [01:32:02]

The "Buy More at Higher Prices" Investment Memo Test

For early-stage growth companies, Durable writes memos with a specific constraint: "We write the memo that says if Duolingo does what we think it can do over the next three years, not only do we make a fair return for the risk of the company... at the time, we would want to buy more at these higher prices. And if we can't write the memo that we want to buy more at higher prices, we can't buy the shares." [00:25:51] This forces intellectual honesty about conviction and addresses the asymmetry between initial positions and ultimate portfolio weights. The corollary: "Our thesis can't be it gets bought." [00:26:01] This discipline prevents the trap of investing in companies you hope get acquired rather than companies building enduring value.

The Friday Insights Meeting: Lateral Learning Without Preparation

Beyond formal investment meetings, Durable gathers weekly for unstructured knowledge sharing: "We get together on Fridays... we have lunches and investment team and we talk about insights. So this is not, you don't prepare for this meeting, but this would be, hey, I had an interesting conversation with a CEO or I was re, I may be this week, I'm sure we'll talk about it. I listened to OpenAI, DevJ, and this was what I thought was interesting." [01:29:20] This creates space for connecting disparate observations and cross-pollinating insights without the pressure of formal presentations. The frequency matters—weekly exposure to colleagues' thinking compounds learning faster than quarterly deep dives alone.

Portfolio Construction: 10-15% Private, with Time Allocation for New Ideas

Durable maintains a specific capital allocation: "At any point in time, we probably have 10, 15% of our capital in the private markets and the rest of the public markets." [00:24:47] But the critical insight is about time allocation: "We don't look at it as a 20 million dollar investment on a 15 billion dollar vehicle. And, you know, we don't look at his 10 basis points or 12 basis points. We actually look at it as our future compounder." [00:25:16] This prevents the trap of sizing decisions based on starting position rather than eventual position. The constraint: doing only "five to 10 new investments a year" [00:21:16] forces high selectivity and enables deep support of each company.

The 360 Review Focused on Specific Investment Contributions

Performance reviews at Durable go beyond platitudes: "When we do 360 reviews at durable, we actually ask everyone to give feedback on what their colleagues did to make it better." [01:27:05] But the key is specificity: "It's not, I mean, it's ported, and we're of really pleasant culture and we have high quality people, but it's not a nook help me this year, and she's a nice person. It's, if you're following DoorDash, it's that a nook help me understand DoorDash because of her knowledge about agenda commerce on Shopify really helped me." [01:27:27] This grounds cultural values in tangible actions and creates a clear model for how to contribute beyond your direct coverage.

6. Overlooked Insights

The Walmart Math: One Bad Decision Erases Decades of Good Ones

While discussing the New Horizons Fund history, Ellenbogen reveals a staggering calculation that went almost unnoted: "The retail fund I think I was managing about $8 billion, which was the largest pool of small cap growth money in the country. And had the stake in Walmart not been sold, the stake in Walmart would have been greater than the sum total of everything that I was managing." [00:05:25] This isn't just about holding winners—it's about how the mathematics of compounding makes position management the most critical skill. When he says "one bad decision, or maybe you had to make that decision every day because the public markets are open every day, wiped out all these other good decisions, mathematically" [00:05:46], he's articulating that the entire game is asymmetric. Getting 99 things right but selling one Walmart early can produce worse outcomes than getting 60 things right and never selling it. This fundamentally challenges how investors should allocate mental energy—most focus on finding new ideas rather than position management of existing ones.

The 2021 IPO Cohort Study: Not All Loss-Making Companies Are Equal

Ellenbogen briefly mentions studying the 2021 IPO class during the 2022 market transition: "I wrote about the 2021 IPO class, right, how they came public in a zero interest rate environment and how many so many of these companies actually we're going to have a tough time getting to profitability and as interest rates went up in 22, I think correctly. A lot of people said actually just throw them all out, right. The average loss making company in 2022... went down over 70%." [00:38:17] But then the critical insight: "Our view was make sense, the markets probably right. But not all of these can't adapt... not all of these don't have businesses that are good enough to make real economic returns. There's not all of these companies didn't have the discipline and the organizational fortitude to transition." [00:38:38] This distinction—between companies that couldn't become profitable versus those that chose high growth in a permissive environment—created massive opportunity. Duolingo, which he "bought more of in 22" [00:39:07], exemplifies this. The insight: cohort analysis obscures individual company quality when market conditions change dramatically.

Note: This summary identifies insights and patterns from Henry Ellenbogen's discussion with Patrick O'Shaughnessy about building durable compounding businesses through disciplined long-term investing across public and private markets.