Notes - Henry Ellenbogen and the Art of Compounding

colossus | December 18, 2025

Henry Ellenbogen, a renowned investor who transformed the T. Rowe Price New Horizons fund from $8 billion to $40 billion over nine years. His approach centers on identifying "compounders"—rare companies capable of sustained, long-term growth—and navigating the "painful transitions" where these companies either succeed or fail,.

1. The Influence of Legacy and Early Career

Ellenbogen’s background is rooted in a legacy of quiet service and high achievement.

  • The Grandfather’s Secret: After his grandfather (the elder Henry Ellenbogen, a Congressman and Judge) died, the family discovered he had secretly saved thousands of lives from the Holocaust by typing sponsorship letters and navigating immigration law,,.
  • "The Boy Wonder": At age 19, Ellenbogen became the youngest administrative assistant (Chief of Staff) in the history of the U.S. Representatives for Congressman Peter Deutsch.
  • Formative Training: During a summer at Goldman Sachs’ risk arbitrage group, he realized he did not want to be an "insurance adjuster" calculating price corrections; instead, he wanted to support people building enduring businesses,.

2. The Science of the "Compounder"

Ellenbogen’s philosophy was refined through his study of market history and his tenure at T. Rowe Price.

  • The Walmart Lesson: By studying 50 years of New Horizons archives, Ellenbogen discovered that only 20 stocks had driven the fund’s success. He realized that selling a company like Walmart prematurely was a catastrophic mistake that no other good decision could offset.
  • The 1% Rule: Data revealed that in any 10-year period, only about 40 out of 4,000 public stocks (1%) compound wealth at 20% annually.
  • Characteristics of Compounders: These businesses show increasing returns on invested capital, meaning they get better and face lepetition as they gain scale. Examples include Vail Resorts, where acquisitions created a subscription-based network that shifted risk from the company to the customer.

3. The "Act 1 to Act 2" Framework

A central tenet of Ellenbogen’s method is separating companies that are dying from those being remade.

  • Act 1: The stage where a company proves product-market fit and unit economics.
  • Act 2: The "leap" to a new product or market that makes the business fundamentally larger.
  • The Valley of Death: Transitions between acts are intensely volatile; a typical compounder might fall 62% during its journey.
    • Example: Netflix: In 2011, Netflix's transition from DVD-by-mail to streaming caused 800,000 cancellations and a 75% stock drop,. Ellenbogen recognized it as a transition, not a failure, and led a $400 million private investment to save the company.
    • Example: Amazon: Contrary to the myth that Jeff Bezos ignored profit, Ellenbogen observed that Bezos ran the retail business with obsessive operational discipline, establishing a cash stream before investing in new initiatives like AWS,.

4. Bridging Public and Private Markets

Ellenbogen pioneered the practice of mutual funds investing in late-stage startups, arguing that companies were staying private longer and capturing more growth before their IPO,.

  • The "Rogue Effort": Starting with companies like Twitter and Workday, Ellenbogen systematically deployed mutual fund capital into private rounds,.
  • Pattern Recognition: His team covers both public and private companies because younger companies often reveal disruptive threats to existing winners (e.g., studying the disruption in web hosting led him to Wix and Shopify).
  • The Network Effect: Ellenbogen uses a "self-reinforcing" network to help startups scale by placing experienced public-company CEOs (like Jeff Boyd of Priceline) onto the boards of private companies (like Clear and Redfin),.

5. "The Last Human Edge": Man vs. Machine

In the age of algorithmic trading and AI (the "robots"), Ellenbogen argues that humans maintain a distinct advantage in specific areas.

  • Trust and Empathy: Machines cannot build the trust required to call a CEO on a Saturday morning to discuss bankruptcy or structure a complex rescue deal.
  • Interpreting Signals: Robots struggle to understand why a CEO selling shares at a loss might be a positive signal rather than a negative one.
  • The Amygdala: Understanding the temperament of an entrepreneur who is solving a problem requires human judgment and an understanding of probabilities and people,,.

6. Durable Capital Partners and Modern Crisis Management

In 2019, Ellenbogen founded Durable Capital Partners to pursue compounding without the structural limitations of mutual funds,.

  • Investing in Chaos: During the COVID-19 crash, he invested $110 million in Redfin and $150 million in FirstService, providing capitalhen others were paralyzed by uncertainty,.
  • Navigating the High-Interest Era: In 2022, as "free money" ended, Ellenbogen guided his portfolio companies, such as Duolingo and Affirm, to pivot from pure growth to extreme financial rigor and profitability,.
  • The AI Platform Shift: Ellenbogen views AI as the fourth major platform shift of his career (following web, mobile, and cloud) and is currently identifying which emerging companies will dominate this new era.