Invest Like the Best with Patrick O'Shaughnessy
· Patrick O'Shaughnessy
[00:00:00] S0: My guest today is Henry Ellenbogen, founder and managing partner of Durable Capital Partners. Henry built his reputation at T. Rowe Price, where he led the New Horizons Fund and turned it into one of the best performing small cap growth portfolios in the country, compounding 19% annually and consistently beating benchmarks for nearly a decade. In 2019, he left to start Durable. His philosophy is grounded in a simple belief that great investing is about understanding people and change. Henry has spent his career studying the rare 1% of companies that drive nearly all long-term returns—businesses led by exceptional operators who turn moments of uncertainty into compounding advantage. Durable's edge comes from that human judgment, from spending time with founders and executives, and learning to tell the difference between a company that is failing and one that is transforming. Henry often talks about Act 2 teams: founders who take the lessons from their first company and apply them to a new frontier. Durable itself is his Act 2. In our latest Colossus profile, managing editor Dom Cooke traces Henry's story and specifically how he became one of the most influential investors of the 21st century, having learned from founders like Jeff Bezos and John Malone in the early part of his career. I always hear the same thing from founders who have met Henry—they say, he understood my business faster than anyone. The thing that sticks with me from our conversation and Dom's profile is just how much he loves investing. As you'll find, his passion is infectious. Please enjoy my conversation with Henry Ellenbogen, and if you haven't, I'd highly recommend reading the profile afterwards. You can find the link to that piece here. I thought an interesting place to begin would be with you telling us the origin story of your investment philosophy. We're gonna talk deep specifics about a lot of things in the world today so that people understand where you're coming from and how you came to your philosophy. I just love to begin there. The key ingredients of the recipe that's become how you attack and think about markets. Where did it come from? Where did it start?
· Henry Ellenbogen
[00:00:00] S1: There's probably a couple places it comes from. One was frankly my own personal background. So I came into investment not directly out of school, it's not like I went a finance path. I went into politics. I wasn't an economics major, I was actually an organic chemistry and a history and technology major. And I worked in politics for many years. As I started to try to figure out what I wanted to do professionally, and eventually I started to think more about investing and I got involved in it. I started to think about investing based on a lot of the same principles that I learned in science, and particularly biology. That in order to have organisms that sustain over a long period of time and persist much like human beings, they'd have to be in balance with their ecosystem. I'm a father of two boys and you see it today when children develop, they gotta basically go through certain curves—child, adolescence, teenager, adult—and they have to basically be in balance. And if they are, they can thrive and do incredible things. And we as human beings, if we do that, look at all the success humans have had relative to every other species. I started to think about why shouldn't investing follow the same rules we see in science? So why shouldn’t investing mean that there should be a healthy balance between companies that invest in their customers, their employees, their shareholders, and actually support their greater communities? And that really resonated with me. And in many ways, I was lucky too that I ended up at T. Rowe Price early in my career. And the guy who became my mentor, Jack Laporte, this is what he believed. He believed that you invested in small companies and they were 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. And that was how he had been so successful over the 25 years he did what he did. So that resonated with me. What happened to me though was a bit of good luck. I was asked halfway through my career at T. Rowe Price to basically go manage the New Horizons Fund. In doing so, I started reading all the shareholder letters. At that point, it was turning 50.
· Henry Ellenbogen
So I actually went into the archives and basically read the shareholder letters and tried to understand what drove the success of this fund over 50 years. At the time, it was the oldest, but also most people would say it was the most successful—from a performance fund—small cap growth fund in the country. And in doing it, I started to realize, wow, it was really only 20 stocks over 50 years that drove the performance. And then coincidentally, Jack or maybe purposely, Jack decided to have a 50th birthday party for the fund. And all the fund managers came except for T. Rowe Price himself who had managed the fund but had passed away. And in doing that, I talked to one of the managers who told the story of meeting Sam Walton on the IPO roadshow, when Walmart first came public. For those of you who don't know, Walmart came public as a super small company, it only had 50 stores. And obviously Walmart became Walmart. And I went back and I looked and I was like, wow, this is definitely one of the 20 stocks that mattered. But actually, unfortunately it was sold. And the math at the time was 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've been greater than the sum total of everything that I was managing. And I'm not saying people had made bad decisions before, but actually the math was one bad decision, or maybe you had to make that decision every day because the public markets are open every day, actually wiped out all these other good decisions, mathematically, they had done. And so what that caused me to do was at that point start to really study the history of the US public market. Since then, I think a lot of people talked about the study that came out of Chicago.
· Patrick O'Shaughnessy
[00:00:00] S0: Yeah, the 4% thing?
· Henry Ellenbogen
[00:00:00] S1: Right. And that's true, but at the time when I did this, no one had actually asked the simple question—in the history of the US equity market, which is to me, representative of capitalism—if there's 4,000 average public stock, how many of them truly are great? And the philosophy we have today is predicated that over a rolling 10 year period, you have about 40 stocks that compound well with a 20% a year or go up a little bit over 6x. So about 1% of the stock market are the valedictorians, and that's what we want to go do. Like a lot of things in life, you get through looking at lateral examples, biology, and then you look at anecdotes and then if you like to double click or you're maybe a geek on data, you start to really study it. And then obviously since then we've tried to create an investment philosophy that maximizes the probability of investing in those 40 companies. And the other thing that we have basically found out is that what's interesting is, about 80% of those companies start their compounding journey as small cap companies. And so people always say, Henry, why do you love small cap companies? I was like, well, I love them because I love the people side of the job, but I also love them because 80% of them, of these great companies, start as small caps. That's what we're trying to maximize because we think that's what creates long-term wealth and economic growth. What we have done is basically purpose-built an investment philosophy, and just as importantly, tried to purposely build an investment organization that can go do that.
· Patrick O'Shaughnessy, Henry Ellenbogen
[00:00:00] S0: I want to ask about each. Your firm is literally named as an ode to this concept, Durable. Durable, long-term compounding growth for the companies that you back. Give us one more click of detail on after that original insight. So you've identified that you wanna be in this group of 40 companies as best you can possibly approximate. What are the common elements that you've discovered that fit your personal and your team style that are indicators that you might have one on your hands? And I know you do late stage private investing as well. So you're looking at these companies when they're at or near their IPO. We'll talk about going public later on and why that's valuable, but what have you refined to be the most important signposts of a company that might be one of these 1% valedictorians? [00:00:00] S1: The first is, if you've been one before, you have a higher probability of being one. Again, which just sounds so simple but is actually really interesting. We look at who has actually done it. And if we don't really know the company and we haven't studied it before, we'll go double-click and go essentially study it, see if there's an opportunity. But if not, go do a case study on it. So we want to go learn it. One of my partners, Anouk Dey, basically teaches a class at Columbia Business School on the value analysis program. [00:00:00] S0: She's amazing.