Invest Like the Best with Patrick O'Shaughnessy
Henry Ellenbogen - Man Versus Machine - [Invest Like the Best, EP.452]
16 Dec 2025 · 108 min
Key points
- Henry Ellenbogen says about 40 stocks in a rolling ten-year window compound at 20% a year, and about 80% start as small caps, so Durable hunts for them early.
- Ellenbogen argues that quantitative funds beat humans at repeat-actor problems on known data, while human judgment about people and change is the edge.
- Ellenbogen says AI will likely be at least as powerful as the internet and will touch almost every company reliant on white-collar and IP work.
Why a few small caps drive decades of returns
Henry Ellenbogen's Durable Capital rests on the idea that a small group of companies produces nearly all long-run equity returns, and most of them begin as small caps. Finding them early takes human judgment about people and change, which short-term quant and agency flows do not capture. AI is the next wave, and Durable looks to advantaged incumbents and proven founders to use it best.
Takeaways
- A few compounders drive nearly all returns. Henry's premise is that about 40 stocks in a rolling ten-year window compound at 20% a year, roughly 6x, and about 80% start as small caps. His study of the New Horizons Fund found only 20 stocks drove 50 years of performance.
- Technology plus convenience wins market share. Domino's began when about a third of US pizza was local shops, and Amazon, Walmart and Costco took 62% of retail sales. Henry says the best tech-enabled businesses gain 30% or more incremental market share.
- AI extends leads of advantaged incumbents. Durable calls it good-to-great, with Duolingo and Colliers using AI to widen existing advantages. Henry expects AI to be at least as powerful as the internet and robotics costs to fall perhaps 15 to 20% a year, leaving laggards two to three years behind.
- Act 2 founders are a favored bet. Durable looks for founders who apply lessons from a first company to a new frontier. Examples include Workday's Aneel Bhusri and Dave Duffield, and Max Levchin, PayPal co-founder and a long-time Durable relationship at Affirm.
- Human judgment beats quants on people and change. Henry says quant funds like Two Sigma excel at repeat-actor problems on known data. He argues 80 to 90% of institutional flow follows one- and three-month models, which helped make the latest earnings season among the most volatile since the financial crisis.
How Durable operates
- It makes five to 10 new investments a year and holds about 10 to 15% of its capital in private markets.
- Investment memos ask whether Durable would buy more at higher prices if the company delivers its plan.
- Each investment is reviewed three years after purchase, and views on AI are written down and updated every six months.
- The investment team has 12 people, who must be excellent at their work and at making colleagues better.
- Culture rests on 360 reviews, Friday lunches and an internal memo habit.