The 1% Compounder: Lessons from Henry Ellenbogen
An underrated investor that deserve the quality investors attention
Finding the “Valedictorians” of the Stock Market
In a recent Invest Like The Best episode, one of my favorite investing podcasts, Patrick O’Shaughnessy interviewed Henry Ellenbogen, the legendary former manager of T. Rowe Price’s New Horizons Fund and founder of Durable Capital Partners.
It was one of those rare conversations that reshapes how you think about long-term investing. Ellenbogen isn’t chasing quarterly beats. He’s hunting for the tiny handful of companies that quietly create most of the world’s equity wealth.
Here are the ideas that stood out most to me and why I think they matter.
1. The Power Law: “The 40”
Ellenbogen’s framework starts with a brutal truth:
“Over any rolling 10-year period, only ~40 stocks, about 1% of the market drive nearly all long-term wealth creation.”
Everything else is noise.
The objective:
Find the small-cap companies that can compound 6x or more over a decade.
The insight:
About 80% of these future giants start as small caps. But Durable isn’t chasing growth-at-all-costs stories. They look for businesses that balance:
Growth
Profitability
Innovation
Not companies burning cash just to post vanity metrics.
2. The “Act 2” Founder Advantage
One of Durable’s strongest filters is what Ellenbogen calls “Act 2” founders, entrepreneurs who already won once and are returning to the same industry with a clean slate.
Examples:
Dave Duffield → PeopleSoft → Workday
Max Levchin → PayPal → Affirm
Why this matters:
These founders have total clarity. They already know:
Where systems break
Which customers matter
What cultural mistakes to avoid
They scale faster, hire better, and build more durable organizations. In Ellenbogen’s words, this creates a “human moat.”
3. AI Is the New “China Cost”
In the 2010s, every physical-goods company had to understand its China cost to stay competitive.
Ellenbogen believes AI is doing the same thing today, for IP and white-collar work.
The key shift:
Legal, HR, coding, content creation → entering a deflationary cost curve
Companies built on expensive human processes will feel pressure
The Amazon lesson:
The winners won’t just use AI to cut costs. They’ll:
Lower prices
Reinvest savings into physical moats (distribution, robotics, infrastructure)
Early example:
Duolingo uses AI to generate content 20x faster, enabling a tiny team to launch massive new verticals like Duolingo Chess.
4. Man vs. Machine: Where Humans Still Win
Ellenbogen is realistic: Quants and pod shops have won short-term alpha.
But they have a fatal weakness, time horizon.
The problem:
Pod managers are judged monthly or quarterly. They can’t survive messy transitions.
The opportunity:
If you deeply understand a company’s people and culture, you can lean into volatility.
His example: Netflix
Stock fell ~75% during the Qwikster era
Culture stayed elite
Long-term investors were handed a generational opportunity
This is where a longer career horizon beats faster machines.
5. “Soft Moats” and the Danaher System
Not all moats look like patents or network effects.
Ellenbogen studies companies inspired by the Danaher Business System (DBS), a culture of continuous improvement (Kaizen).
What he looks for:
Decentralized incentives
Obsessive capital allocation discipline
Relentless operating efficiency
Examples include Colliers and FirstService, where the moat isn’t technology, it’s how the organization thinks and allocates capital.
At Durable, every investment requires a written memo answering one question:
“If this works, would we buy more at a higher price?”
If the answer is no, they don’t buy the first share.
6. Why Public Markets Still Matter
While many founders want to stay private forever, Ellenbogen believes public markets are a feature, not a bug.
Why?
Daily price feedback forces discipline
Cash flow reality can’t be ignored
Crises trigger incentive realignment
Netflix’s 2011 crisis is again the model: the public market’s pressure forced management to get aggressive about the next S-curve.
Why “Messy” Moats Last
Henry Ellenbogen’s favorite competitive advantages aren’t flashy, they’re messy and hard to replicate.
First, he loves physical-world moats like Amazon’s distribution network or Carvana’s reconditioning centers. These can’t be “spun up” overnight. You need the right land, location, CapEx, systems, and most importantly operating culture. Get any piece wrong and the cost advantage disappears. This is why Ellenbogen gets excited about robotics layered onto distribution: it doesn’t create the moat, it deepens one that already exists.
Second, he believes deeply in “soft moats” built on people, culture, and capital allocation. He often points to Danaher, which compounded capital at ~20% for decades without patents or network effects. The edge came from Kaizen, accountability, and disciplined incentives.
The same logic explains his conviction in companies like Colliers and FirstService. On the surface, these are ordinary businesses. Underneath, they’re run by exceptional operators with aligned incentives and relentless execution.
Bottom line: The most durable advantages are slow, human, and operationally painful to copy and that’s exactly why they endure.
Bottom Line
Great investing isn’t just spreadsheets.
It’s about identifying the 1% of humans who can navigate discontinuous change while maintaining the discipline of a compounder.
Look for:
Act 2 leaders
AI-driven IP cost deflation
Soft moats rooted in culture and capital allocation
The courage to hold through “messy” transitions
If you’re interested in Ellenbogen’s specific holdings, you can find them in his 13F filings. I highly encourage you to listen to the full episode or read through it. It’s packed with thoughtful and insightful ideas. If anyone happens to have access to his internal letters, I’d greatly appreciate it if you could share, and I’ll also try my luck reaching out directly.
Finally, a huge thank you to all my subscribers especially to my paid subscribers. I never imagined that over 500 people would be willing to spend their valuable time reading my posts.
This will be my final post of the year, so from me to you, wishing you a wonderful holiday season and a happy, prosperous new year! Stay tuned, because next year I have a major announcement coming that you won’t want to miss!
Disclaimer: The information in this newsletter is for educational and informational purposes only. I may hold positions in some of the securities mentioned. This is not investment advice and should not be taken as a recommendation to buy or sell any security. Always conduct your own research before making investment decisions.
Thanks for this one, really appreciate reading about lesser-known successful investors.
"The most durable advantages are slow, human, and operationally painful to copy and that’s exactly why they endure."
Does he share any thoughts about MEITUAN, a food delivery company in China, which sounds like a perfect match to this statement?