This piece explains how investor Henry Ellenbogen finds the 1% of stocks that compound for decades. He says 80-90% of market money is short-term, creating mispriced opportunities. He likes Duolingo (AI language app, fell 70% in 2022 but he bought more), Affirm (buy-now-pay-later, co-founded by PayPal's Max Levchin, AI lets it grow without hiring), and Colliers (property services, bought heavily when interest-rate fears hit it). His rule: only buy stocks you'd want to add to when they go up.
Henry Ellenbogen, founder of Durable Capital Partners, established himself as a top small-cap growth fund manager during his tenure managing the New Horizons Fund at T. Rowe Price. His core investment philosophy holds that great investments stem from understanding people and change, and that long-te
Henry Ellenbogen, founder of Durable Capital Partners and former manager of the T. Rowe Price New Horizons Fund (with an annualized return of 19% over nearly a decade). The core theme of this episode: how to identify and invest in the 1% of companies that deliver long-term compounding growth. Ellenbogen argues that long-term returns are almost entirely driven by the 1% of "top graduates" in the market, and 80% of these companies start as small-cap stocks — a finding that forms the foundation of his entire investment philosophy.
Ellenbogen's core finding is that in U.S. stock market history, only about 40 stocks per rolling 10-year period achieved compound annual growth of over 20% (approximately a 6x return), representing just 1% of all stocks.
This insight originated when he took over the New Horizons Fund and read the fund's 50 years of shareholder letters. He discovered that only 20 stocks truly drove the fund's performance over those five decades. The more critical trigger was learning that the fund had invested in Walmart during its IPO roadshow but later sold the position — had it not sold, the value of that single Walmart holding would have exceeded the entire $8 billion in assets he managed at the time. Ellenbogen noted: "A single wrong sell decision mathematically erased the contribution of every other correct decision."
80% of these "star graduates" started as small-cap stocks, which is the fundamental reason Ellenbogen focuses on small-cap growth stocks. Durable Capital Partners' investment philosophy is to maximize the probability of investing in these 40 companies.
Ellenbogen argues that "Act II" teams with prior successful entrepreneurial experience have a significantly higher probability of succeeding again. This is one of Durable's core investment themes.
He cites Workday as an example: co-founders Anil Bhusri and Dave Duffield previously founded PeopleSoft (acquired by Oracle) and started anew in the cloud era. Ellenbogen points out that HR systems must handle a large number of complex "exception management" scenarios, and only those who have built one before truly understand how to construct it — this is the core advantage of Act II teams.
Another example is Max Levchin (co-founder of PayPal, later founded Affirm). Ellenbogen comments: "Max truly understands how technology can be applied to solve problems in complex systems, can recruit top-tier talent, is an outstanding leader, and is exceptionally resilient." Durable invested in Max during his Slide era and is now investing in Affirm — "If you've worked with someone for 20 years, you know their resilience and how they perform under pressure."
Durable itself is also an Act II — Ellenbogen once considered naming the firm "Act II Capital." He concludes: "If you've already succeeded once, you can redesign everything from a blank slate — organizational structure, incentive mechanisms, investor relations — exactly the way you want."
Ellenbogen proposes a counterintuitive principle: for early-stage growth companies, if you cannot write an investment memo stating, "When it performs well, we are willing to buy more at a higher price," you should not buy at all.
Durable's investment memo structure is unique. For early-stage growth companies that have yet to establish a competitive advantage, they require: "If Duolingo does what we believe it can over the next three years, we will not only achieve a reasonable return, but at that point, we will want to buy more at a higher price. If we cannot write such a memo, we cannot buy."
This strategy has two application scenarios:
1. Early Growth Stage: The company has not yet built a competitive advantage but shows potential — if it "scales up and de-risks," Durable will add to the position
2. Mature Growth Stage: Such as Colliers — when the market sells off due to macro concerns (the impact of high interest rates on commercial real estate brokerage), Durable buys heavily because they understand that Colliers' asset quality (asset management + consulting platform) is far superior to that of ordinary commercial real estate companies
Ellenbogen emphasizes: "We have roughly 10-15% of our capital in private markets, with the rest in public markets. But we must be willing to spend adequate time on new ideas. When we look at Duolingo, we do not see it as a $20 million investment (10-12 basis points) within a $15 billion fund; rather, we see it as our future compound growth stock."
Ellenbogen estimates that 80–90% of institutional capital flows are driven by funds with "one-month or three-month agency mandates" or quantitative funds, creating significant market volatility and pricing errors.
After studying quantitative funds, he concluded: "Quantitative funds excel at repetitive problems based on known data. But if you are good at understanding people and change, you have an advantage." This led him to conduct internal training on "humans vs. machines" during his time at T. Rowe Price, deciding to double down on the two areas of "understanding people and change."
He observed that the volatility during the Q2 2024 earnings season was the highest since the financial crisis — despite no challenges to the banking system at the time. He attributes this to the agency problem of short-term capital: "If you work at a firm that measures your risk daily, and underperforming for three consecutive months leads to capital cuts or even termination, you cannot possibly have an investment horizon longer than your career cycle."
Durable's response strategy is "do less, so you can do more" — accept stock price volatility, but truly understand the nature of the business and the people. For example, Duolingo plunged over 70% in 2022 along with IPO stocks, but Durable believed the market "might be right 90% of the time," and that Duolingo belonged to the 10% of companies capable of adapting to changes in the interest rate environment, so they significantly increased their position.
Ellenbogen argues that AI's impact may be greater than the internet's, as it affects not only technology companies but also every enterprise reliant on white-collar and knowledge workers.
He offers a key analogy: "By the late 2010s, every business knew it had to understand 'China costs' — the cost advantage in global supply chains. Now, every business must understand 'AI costs' — but this time not at the product level, but at the intellectual property and process level."
Specific examples:
Ellenbogen believes the AI-driven cost reduction curve could be 15-20% per year (rather than Amazon's 3-5% per year), which will create new power-law distribution winners.
Ellenbogen’s two most favored competitive advantages: physical infrastructure (irreplicable) and an exceptional human capital culture (extremely difficult to imitate).
Physical Moat: Taking Amazon and Carvana as examples—"You cannot just build these facilities out of thin air. You need to acquire land, build in the right locations, construct the right network, deploy the right capital and systems, and establish the right operational culture. If you place real estate in the wrong location, transportation costs will be higher."
Soft Cultural Moat: Taking Danaher and Colliers as examples. Danaher’s DBS (Danaher Business System) has consistently delivered 20% compound growth over 40 years, without data network effects or a physical moat—relying instead on human capital, operational excellence, and capital allocation. Colliers’ CEO Jay Hennick (a disciple of Peter Drucker) has built a unique partnership culture through "localized incentives and decentralized decision-making."
Ellenbogen concludes: "If a competitor wakes up tomorrow and does exactly the same thing, with equally talented people, you are still ahead—that is the definition of a competitive advantage."
Ellenbogen argues that for companies aspiring to be "generational firms," the public market path has proven effective—despite the pain it entails.
He cites Netflix as an example: during the transition from DVD-by-mail to streaming, the stock price fell from $280 to $70. At the time, Ellenbogen was at T. Rowe Price and called Reed Hastings, saying: "You are shifting from a variable cost model (renting DVDs per usage) to a fixed cost model (prepaying large content fees). If subscriber churn exceeds expectations, you will run out of cash." Reed initially disagreed but eventually accepted the scenario analysis, completing a PIPE financing at a $4.5 billion valuation (with T. Rowe Price contributing half). Today, Netflix's market cap far exceeds that figure.
Ellenbogen believes public markets offer three values:
1. Signals: A stock price decline is the market saying, "Your financial assumptions require broader scenario analysis."
2. Discipline: It forces companies to balance growth, profitability, and innovation. The CFO is not a "police officer" but a "salesperson of standards."
3. Incentive Alignment: A stock price decline realigns the team, and those who stay are richly rewarded.
"If you want to become a great company, you must balance growth, profitability, and innovation. Public markets force you to do this earlier and more clearly."
| Position | Guest Stance | Key Data |
|---|---|---|
| Duolingo | Bullish (early-stage growth, AI risks and opportunities coexist) | Fell over 70% in 2022 along with IPO stocks; Chess product developed in 9 months, over 1M DAU |
| Affirm | Bullish (Act II team, AI efficiency gains) | Can grow without adding headcount; Max Levchin is a co-founder of PayPal |
| Colliers | Bullish (misunderstood high-quality asset) | Durable bought heavily during sell-offs caused by high interest rates; CEO Jay Hennick is a disciple of Peter Drucker |
| Amazon | Bullish (classic example of cost curve advantage) | 3-5% annual cost reduction sustained for 20 years; Ellenbogen invested when market cap was $10B |
| Netflix | Bullish (successful transformation case) | Stock fell from $280 to $70; PIPE financing at $4.5B valuation |
| DoorDash | Bullish (Durable led the last private round) | Specific data not disclosed |
| Toast | Bullish (Durable led the last private round) | Specific data not disclosed |
| Figma | Bullish (Durable has held since $30M revenue) | Private investment in 2020, led round in 2021 |
| Warby Parker | Bullish (Durable led the last private round) | Specific data not disclosed |
| Carvana | Bullish (physical moat) | Specific data not disclosed |
| Danaher | Bullish (Kaizen culture exemplar) | 20% compound growth for 40 years; Mitch Rales is Chairman |
| Shopify | Bullish (CEO Toby analogy) | Specific data not disclosed |
| Workday | Bullish (Act II team case) | Invested at ~$100M revenue; led round at $2B valuation |
| Walmart | Neutral (historical case) | Only 50 stores at IPO; together with Amazon and Costco, accounts for 62% of retail |
| Costco | Neutral (historical case) | Same as above |
| Domino's Pizza | Neutral (historical case) | Best Russell 2000 growth stock in the 2010s; annual growth <10% |
| FirstService | Bullish (under Jay Hennick) | Specific data not disclosed |
1. "Only 1% of stocks are true compounders" (Ellenbogen) — Over any rolling 10-year period, roughly 40 stocks deliver 20%+ annualized returns, with 80% starting as small caps. This is the data bedrock of Durable's investment philosophy.
2. "Act II teams have a significantly higher probability of success" (Ellenbogen) — Workday's founder previously built PeopleSoft, and Affirm's Max Levchin was a co-founder of PayPal. Durable itself is an Act II.
3. "If you can't write a memo saying 'I'd be willing to buy more at a higher price when performance is strong,' you shouldn't buy" (Ellenbogen) — This is Durable's "dollar-cost averaging upward" strategy, the opposite of the market consensus of "buy low, sell high."
4. "80-90% of institutional capital is driven by short-term agency problems" (Ellenbogen) — This creates mispricing opportunities. Durable's strategy is "do less to do more," buying what it truly understands amid volatility.
5. "AI is the digital version of Kaizen, and its impact will be greater than the internet" (Ellenbogen) — Analogous to how "China cost" affected product businesses, AI cost will impact all knowledge work workflows. The cost decline curve could reach 15-20% per year.
6. "Physical infrastructure moats and human capital culture moats are the most enduring" (Ellenbogen) — Amazon's fulfillment centers and Danaher's DBS system are both things competitors cannot catch up on even if they "wake up tomorrow and do the same thing."
7. "Daily pricing in public markets is a discipline tool, not a burden" (Ellenbogen) — During Netflix's transition from $280 to $70, it forced the company to align incentives, broaden scenario analysis, and ultimately led to today's market cap.
8. "There are two kinds of competitive greatness: Michael Jordan-style and Steph Curry-style" (Ellenbogen) — Durable chooses the latter: wanting everyone to win, elevating the game itself through competition rather than destroying opponents. This is reflected in their continued relationships with founders even after selling the stock.