Invest Like the Best• Dec 16, 2025• 1:54:49Interview

Finding The 1% of Stocks That Matter | Henry Ellenbogen Interview

From Invest Like the Best

Henry Ellenbogen•CIO and Managing Partner, Durable Capital Partners

Executive Summary

The vast majority of long-term stock market returns are driven by a tiny fraction of companies (~1%), and the core investment strategy is to identify and hold these 'compounders' for the long term.
The philosophy was shaped by an analysis of the T.
Rowe Price New Horizon Fund, which revealed that selling a massive winner like Walmart early wiped out the value of countless other good decisions.
The firm prioritizes investing in experienced 'Act II entrepreneurs'—founders who have successfully built companies before—as they have proven resilience and a higher probability of future success.
Artificial intelligence is viewed as a transformative force, on par with the internet, that is creating new, steeply deflationary cost curves in areas like robotics and content generation, which will separate market leaders from laggards.

11 quotes

Concerns Raised

The risk of prematurely selling a generational 'compounder' stock, thereby forfeiting the majority of its potential returns.
Companies failing to adapt to the new deflationary cost curves being created by AI and robotics.
The inherent volatility of even the best-performing growth stocks, which often experience 50%+ drawdowns.

Opportunities Identified

Identifying and holding the 1% of 'compounder' companies that drive the vast majority of long-term market returns.
Investing in experienced 'Act II entrepreneurs' who have a higher probability of building another successful company.
Capitalizing on the transformative impact of AI to invest in companies building durable, technology-driven competitive moats.
Leveraging the short-term focus of public markets to acquire long-term assets at attractive prices during periods of volatility.

Key Themes

The Power Law of Compounding

The investment thesis is built on the observation that over any 10-year period, only about 40 companies, or 1% of the U.S. stock market, are responsible for the majority of wealth creation. The strategy is to identify these 'valedictorians' early, often in the small-cap stage, and hold them through their compounding journey.

This challenges traditional diversification, emphasizing that finding and holding a few extraordinary winners is more critical than avoiding losers. It highlights the immense opportunity cost of selling a generational company too soon.

Backing the 'Act II Entrepreneur'

The firm focuses on investing in founders and leaders who have previously built and scaled successful businesses, such as the founders of Workday (ex-PeopleSoft) or Affirm (Max Levchin). These leaders have a proven playbook for success, resilience under pressure, and a demonstrated ability to execute.

Investing in proven leadership de-risks the human capital component of a venture. This experience is especially valuable during periods of intense technological change, as these leaders are better equipped to navigate disruption and capitalize on new opportunities like AI.

AI and Robotics as the New Cost Curve

AI and robotics are creating a fundamental shift in business operations, enabling geometric cost reductions rather than linear improvements. Companies that adopt these technologies, like Amazon did with logistics, can create a compounding cost advantage that becomes an insurmountable competitive moat over time.

This framework moves the analysis of AI from a buzzword to a core driver of competitive advantage. Investors must assess which companies are positioning themselves on this new, deflationary cost curve, as those who don't will be left behind.

Durable Moats in the Physical World

The speaker expresses a strong preference for companies with competitive advantages rooted in complex, physical infrastructure, such as logistics networks or manufacturing facilities. These moats are extremely difficult, expensive, and time-consuming for competitors to replicate, offering a more durable defense than purely digital advantages.

In an era dominated by software, this highlights the underestimated value of physical world operations. These messy, capital-intensive assets create high barriers to entry and can sustain a company's competitive edge for decades.

Long-Term Perspective in Short-Term Markets

An estimated 80-90% of public market trading is driven by investors with a one-to-three-month time horizon, creating significant volatility. This short-termism creates opportunities for long-term investors to acquire stakes in great companies during drawdowns, as even the best compounders experience 50%+ declines on their journey.

This justifies a private-market mindset when investing in public equities. By focusing on a multi-year horizon, investors can ignore market noise and capitalize on the volatility created by others' short-term focus.

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Topics

Investment Philosophy Long-Term Investing Compounding Power Law Growth Investing Small-Cap Investing Durable Capital T. Rowe Price Act II Entrepreneurs Artificial Intelligence (AI)Robotics Cost Curves Competitive Moats Public Markets Private Markets Duolingo Affirm Walmart

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