Henry Ellenbogen - Man Versus Machine - [Invest Like the Best, EP.452]
Timestamps are as accurate as they can be but may be slightly off. We encourage you to listen to the full context.
Podcast Summary
Henry Ellenbogen, founder and Managing Partner of Durable Capital Partners, shares his compelling investment philosophy built on the principle that great investing is about understanding people and change. (04:00) Drawing from his background in science and politics, Henry developed the core belief that successful businesses must maintain balance between stakeholders - customers, employees, shareholders, and communities - much like organisms thriving in their ecosystem. (05:29)
After taking over T. Rowe Price's New Horizons Fund, Henry conducted groundbreaking research that revealed only about 1% of publicly traded companies (roughly 40 out of 4,000 stocks) truly compound wealth at 20% annually over rolling ten-year periods. (08:12) This insight became the foundation of Durable's investment strategy: purpose-building an organization to maximize the probability of investing in these rare "valedictorian" companies. Remarkably, 80% of these exceptional businesses start their compounding journey as small-cap companies, which explains Durable's focus on this segment. (11:33)
The conversation explores how Henry identifies potential compounders through pattern recognition, studying "Act Two" entrepreneurs who leverage lessons from previous ventures, and understanding transformative change - particularly AI's potential to create the next generation of competitive advantages across industries. (20:40)
- Core Theme: Building a durable investment firm focused on the rare 1% of companies that drive nearly all long-term market returns through superior understanding of people dynamics and transformational change.
Speakers
Henry Ellenbogen
Henry Ellenbogen is the founder and Managing Partner of Durable Capital Partners, which he launched in 2019. He previously built his reputation at T. Rowe Price, where he led the New Horizons Fund and transformed it into one of the best-performing small-cap growth portfolios in the country, compounding at 19% annually and consistently beating benchmarks for nearly a decade. Before entering finance, Henry worked in politics and has an unconventional background with degrees in organic chemistry and history of technology rather than traditional finance education.
Key Takeaways
Focus on the 1% of Truly Great Companies
Henry's research revealed that over rolling ten-year periods, only about 40 companies out of 4,000 publicly traded stocks compound wealth at 20% annually (going up 6x or more). (08:12) This represents just 1% of the market - the "valedictorians" that drive nearly all long-term returns. The key insight is that 80% of these exceptional companies begin their compounding journey as small-cap businesses, making early identification crucial for long-term wealth creation.
Invest in "Act Two" Entrepreneurs
Companies led by founders applying lessons from their previous ventures have higher probability of success. (20:40) Henry cites Workday's founders, who had built PeopleSoft before, as perfect examples - they understood both the technical challenges and market nuances from experience. These entrepreneurs start with total clarity, can align all aspects of the organization optimally, and avoid first-time founder mistakes. This pattern recognition has driven many of Durable's most successful investments.
Dollar Cost Average Up on Winners
Durable's unique approach requires believing so strongly in early-stage investments that they're willing to buy more shares at higher prices as companies prove their thesis. (30:30) If you can't write a memo saying you'd want to buy more at higher prices after a company executes successfully over 3 years, you shouldn't make the initial investment. This contrarian approach helps build meaningful positions in true compounders while they're still growing.
Leverage Market Structure Inefficiencies
With 80-90% of institutional flow driven by short-term focused quantitative funds and firms with monthly measurement periods, massive opportunities exist for patient capital. (35:24) These market participants can't own companies experiencing temporary volatility or transformation, even when the underlying business fundamentals remain strong. This creates pricing dislocations that benefit investors who can look beyond quarterly noise to focus on multi-year business development.
Build Investment Culture Around Making Colleagues Better
Excellence at Durable requires both individual performance and actively improving teammates' capabilities. (83:38) During 360 reviews, employees must provide specific examples of how they helped colleagues succeed on particular investments or analyses. This "and culture" rather than "or culture" creates compound learning effects across the organization and ensures knowledge sharing that benefits all investment decisions over time.
Statistics & Facts
- Over rolling ten-year periods, only about 40 companies out of 4,000 publicly traded stocks (1%) compound wealth at 20% annually or go up 6x or more. (08:12) This research forms the foundation of Durable's investment philosophy.
- 80% of these exceptional compounding companies actually start their journey as small-cap businesses. (11:33) This statistic explains why Durable focuses heavily on small-cap investing despite the additional complexity.
- An estimated 80-90% of institutional investment flow is now driven by firms with one-month or three-month agency problems, or quantitative funds that must incorporate short-term price signals. (39:44) This creates structural opportunities for longer-term focused investors.
