Invest Like the Best with Patrick O'Shaughnessy
· Henry Ellenbogen
[00:00:00] S1: We're a writing culture, because at the end of the day, human beings are innately human. When we are involved in something, it's very hard to have that executive distance that you need to do to really hold yourself accountable to what you thought and actually hold the companies accountable to what you would like them to do. Especially since we really do know the people we invest in, and we invest in really high quality interesting people, and we're deeply rooting for everyone to succeed. Unlike a venture capital firm or private investing firm, we have to be able to understand when things aren't working out so we can sell them. But just as importantly, if we're gonna go invest in something that has real risk like Duolingo, we have to understand when things like Duolingo are really inflecting, and maybe we see it and other people don't, so we can go buy more of it. So we gotta be able to do both. When we write an investment memo, it's in service of our investment philosophy, making sure we've done the work and we can clearly articulate why is a company competitively advantaged or will it be? What would it have to do? Why is this operating culture excellent or why does it have the seeds of an excellent operating culture? And why does this leader think like an owner where they can basically make the business better, which we define as gaining market share through cycle? And we think that they can allocate internal and external capital such to both drive more durable growth and also make their asset base more valuable over time. That's our investment memo. But then just as importantly, through both modeling but clearly spelling out what we're tracking, we have to then be able to, when we do our quarterly, what are really our operating reviews at Durable, where we go through the entire portfolio with the entire investment team on every single investment, we have to look how actually the companies are doing against what we thought they would do. And then every single investment at Durable, if we own for three years, we actually do a three year lookback on what we underwrote and what it did. And that one, like so many things in your career you wish you would've known earlier. The great thing about investing and the great investors to me actually are better at 70 than they are at 50.
· Henry Ellenbogen, Patrick O'Shaughnessy
And hopefully—I'm in my fifties—I'm better than I was when I did this at 30. And you just learn, you understand patterns better. Hopefully you remain humble so you don't actually get too stuck in your ways. You surround yourself with smarter, better people, both internally and externally, but one of them is you just develop better processes. And one of the processes that we only started two years ago was, we always did quarterly KPIs or operating reviews, but we didn't go back and look at an investment that we owned for three years and just say—and when we do them, they're so simple—we say, three years ago we thought they would do X and now they did Y. Now of course the conversation is, where was it different and why, but actually the preparation for that meeting is, at least on the written side, so simple. It's two slides. But then of course we're all human and even though we try to hold each other accountable, if you get together every quarter and something deviates a little bit, you tend to excuse it. Of course if it deviates a little bit for 12 straight quarters, actually it's staring you in the face. That's why we're such a big believer in investment memos. [00:00:00] S0: I think in 2022 you went and did a tour talking to CEOs about the state of the market and operating principles and things like this. I'm curious to hear you reflect on that tour, but even more interested to hear if you were to do a tour of every CEO in the portfolio today, and maybe you're doing this actively, what the message would be today that's different than the message was in 2022?
· Henry Ellenbogen
[00:00:00] S1: I felt in 2022 we truly had expertise to add to the conversation. And that was we, at the highest level—and by the way, I don't say we versus us—we all, every CEO I talked to every investor I talked to, and even Durable, who as a fundamental investment firm that really values stuff on cash flow and never felt money was gonna be free forever, had made simplifying assumptions based on almost a decade of free money. Anyone who has been taught how to value companies understands at the end of the day all companies have to be valued on free cash flow and organic growth. At the time we got to a point where 30% of all treasury bills in the world actually had negative yields and relative to inflation, you were being paid to borrow, which basically means it was logical for venture capitalists to value companies and not care about profitability at all. It was logical for companies in the public markets to buy low quality businesses that could never own their cost of capital, but used cheap debt to go do it. It was logical why if you sat on company's boards, you really wouldn't ask hard questions about trading off growth, profitability and innovation, because you didn't have to. And if you go back to the conversation we had when we eventually studied compounding, we went back and we ran that study, in periods we’d looked at the public markets and we asked ourselves a simple question: in the world of positive real rates, which is the entire history of the US equity market, except for that short period of time, which I don't know if we'll ever see again. There's on average about 40 compounders and during the period of time of free money there was 120. So it was three times easier to do it. And then we asked ourselves a simple question, what patterns only exist when money's free? So not surprisingly, everyone would imagine the pattern of driving growth and profitability is perennial and actually works, regardless of whether money is free or not. The other thing that was really interesting, which was really important to us and gave us confidence to go buy more of the Duolingos in '22 when we did this work, is that if you are a small company, you don't have to be GAAP 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.
· Henry Ellenbogen
And then what doesn't work, well, a company that doesn't earn financial returns and is showing no progress. And the other one that doesn't work, which we don't do a lot of was go buy a low quality return business at a high price but leverage really cheap debt. So I felt strongly, because we had seen cycles before and because we truly had expertise, and also because we're really, to companies that we invest, in a long-term partner. We wanna invest in companies that are private and still own them when they're public, we want to help them with that transition. I thought we had expertise and a perspective that many people had not gone in before. And so to reference what this meant was we had these conversations with a number of our companies that were in this situation. And so we had some version of this conversation with Aman at Toast, with Luis at Duolingo, with Max at Affirm. And all of them were a little different. As an example with Luis, I had dinner with him and the CFO, and his CFO's very talented, just like he is. And I just presented them the data. Knowing them, I knew they would have a lot of questions on it and they asked a lot of good questions. The other thing I said to them is, look Luis, when we invest in your company, one of the things I always ask people is we'll articulate what we're looking for in you, but what are you looking for in us? And one of the things he said is, I'm gonna be a first time CEO and my sense is you're gonna see things based on your experience that maybe I don't see because this is new to me. And I said, the reason I wanted to have dinner with you is not because I have all the answers, but I have a strong view that you're dominant in what you do. AI's amazing for you. AI was just getting started. You have a very unique humic capital culture, but if you're gonna communicate to people this strength in the market, it doesn't mean you need to get to your long-term margin targets at 30%, but you have to show progress towards it. With other companies, we restricted the stock, we spent more time with them, we helped them understand what this means. We even helped a bunch of them think about how to communicate what they were gonna do in this path of this transition to their investors.
· Henry Ellenbogen, Patrick O'Shaughnessy
That to me is different than where we are in 2025 because I felt we had real expertise there and something to add to the conversation that a lot of these executives hadn't seen before as operators, and frankly many of their board members had come of age in a period of time where money was free, and frankly probably hadn't been in involved as many durable companies as we had been involved in. So the answer is I think probably we're more back to learning and normal interaction than we are having a perspective that we're dying to explain to people. [00:00:00] S0: I heard that in the early T. Rowe days that you were studying media and you studied 20 or 30 years’ worth of media history and condensed it down to a very small three or four page report. Can you bring us back to that study and what you learned about media? I'm obviously interested in media. I'm curious what you learned then about media and how that has evolved ever since.
· Henry Ellenbogen
[00:00:00] S1: I tend to wanna do this. I always believe that if you really understand something, you can make it super concise. And where we are with robotics and less so with AI, our internal memos are probably too long, because frankly there's too much unknown and so we can't be concise. I was very lucky in media, and it's something we try to do at Durable with people, because I was an outsider to the media industry. I think I brought fresh perspective to it. When I was assigned to be a media analyst—this is so hard to believe, but the companies that were viewed as the darlings of balancing durability in terms of competitive moats and having strong growth were companies like Comcast, Time Warner, Disney, Viacom. I did a bunch of work on the companies individually and then I started to really think hard about it. And I started to realize that the best businesses inside of all of them had been the cable networks. If you read about media back then, the entrepreneurs that became the most famous were the ones that launched cable networks. John Hendricks, Ted Turner, Bob Johnson—by the way, John Malone basically backed almost all these people and put the most investment in. So John Malone was at the center of all this. For 20 years, cable networks grew 20% with 20 ROEs. So they were compounders and that's how you had all these entrepreneurs that had become billionaires, and that's how you had media companies that really fought over a balance of content and distribution so they could all get their fair share of these economics. And then when you went and you looked at a bunch of the other industry, it was like an average ROA business, and that was what the whole industry was. But the whole thing, if you really thought about it, a systematic level was predicated on a closed system, which is so obvious today. What the closed system was predicated on, I'm only gonna show you the product or the TV show that you most wanna watch when I can make the most money. Not when you wanna consume it. Even in a world of linear TV, even though the most people watched TV on Sunday night, the worst shows showed up on Sunday night because people had spent their money on the weekend, and they were going back to work and they weren't gonna go shopping and go out. And the best shows showed up on Thursday Night Friends, the Cosby Show.