Henry Ellenbogen - Man Versus Machine (EP.452)

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00:00:26To see what happens when you eliminate the busy work, check out Ramp.com slash Invercans. Hello and welcome everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. If you enjoy these conversations and want to go deeper, check out Colossus Review, our quarterly publication with in-depth profiles of the people shaping business and investing. You can find Colossus review along with all of our podcasts at join colossus.com. Patrick O'Shaughnessy is the CEO of Positive Sum. All opinions. expressed by Patrick and podcast guests are solely their own opinions and do not reflect the

00:01:07opinion of positive sum. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of positive sum may maintain positions in the securities discussed in this podcast. To learn more, visit psum.vc. My guest today is Henry Ellen Bogan, founder and managing partner of durable capital partners. Henry built his reputation at T-Roe, he led the New Horizons Fund and turned it into one of the best performing small-cap growth portfolios in the country, compounding 19% annually and consistently beating benchmarks for nearly a decade. In 2019, he left to start Durable. His philosophy is grounded in a simple belief that great investing is about understanding people and change. Henry has spent his career studying to rare 1% of companies that drive nearly all long-term returns,

00:01:56businesses led by exceptional operators who turn moments of uncertainty into compounding advantage. Durable's edge comes from that human judgment, from spending time with Founders, and the executives and learning to tell the difference between a company that is failing and one that is transforming. Henry often talks about Act 2 teams, founders who take the lessons from their first company and apply them to a new frontier. Durable itself is his act 2. In our latest Colossus profile, managing editor Dom Cook traces Henry's story and specifically how he became one of the most influential investors of the 21st century, having learned from founders like Jeff Bezos and John Malone in the early part of his career. I always hear the same thing from founders who have met Henry.

00:02:33They say, he understood my business faster than anyone. The thing that sticks with me from our conversation and Dom's profile is just how much he loves investing. As you'll find, his passion is infectious. Please enjoy my conversation with Henry Ellen Bogan, and if you haven't, I'd highly recommend reading the profile afterwards. You can find a link to that piece in the show notes below. I thought a interesting place to begin would be with you telling us the origin story of your investment philosophy. We're going to talk deep specifics about a lot of things in the world today so that people understand where you're coming from and how you came to your philosophy. I just love to begin there.

00:03:11The key ingredients of the recipe that's become how you attack and think about markets. Where did it come from? Where did it start? There's probably a couple places that come from. One was, frankly, my own personal background. So I came into investment, not directly out of school. school. It's not like I went a finance pass. I went into politics. I wasn't an economics major. I was actually an organic chemistry and a history and technology major. And I worked in politics for many

00:03:43years. As I started to try to figure out what I wanted to do professionally and eventually I started to think more about investing and I got involved in it, I started to think about investing based on a lot of the same principles that I learned in science, in particularly biology, that in order to have organisms that sustain over a long period of time and persist, much like human beings, they have to be in balance with their ecosystem. I'm a father of two boys, and you see it today. When children develop, they got to basically go through certain curves, child, adolescence, teenager, adult, and they have to basically be in balance. And if they are, they can thrive and do incredible things.

00:04:32And we as human beings, if we do that, look at all the success humans have had relative to every other species. I started to think about why shouldn't investing follow the same rules we see in science? So why shouldn't investing mean that there should be a healthy balance between companies that invest in their customers, their employees, their shareholders, actually support their greater communities. And that really resonated with me. And in many ways, I was lucky, too, that I ended up at Euro Price early in my career. And the guy who became my mentor, Jack Laporte, this is what he believed. He believed that you invested in small companies,

00:05:14and they were run by people who thought like owners. They woke up every day to make themselves better. They gave their employees a good deal. They had good cultures. They allocated capital. Well, this is what created companies that could grow and sustain. And that was how he had been so successful over the 25 years he did what he did. So that resonated with me. What happened to me, though, was a bit of good luck. I was asked halfway through my career at Tiro Price to basically go manage the New Horizon Fund. In doing so, I started reading all the shareholder letters.

00:05:50At that point, it was turning 50. So I actually went into the archives and basically read the shareholder letters and tried to understand what drove the success of this fund over 50 years. At the time, it was the oldest, but also most people would say it was the most successful from a performance fund, small cap growth fund in the country. And in doing it, I started to realize, wow, it was really only 20 stocks over 50 years that drove the performance. And then coincidentally, Jack, or maybe purposely, Jack's,

00:06:22decided to have a 50th birthday party for the fund. And all the fund managers came, except for Tiro Price himself, who had managed the fund, but was passed away. And in doing that, I talked to one of the managers who told the story of meeting Sam Walton on the IPO Roadshow when Walmart first came public. For those of you don't know, Walmart came public as a super small company. He only had 50 stores. And obviously Walmart became Walmart. And I went back and I looked. And I was like, wow, this is definitely one of the 20 stocks that mattered, but actually, unfortunately, it was sold. And the math at the time was the retail fund. I think I was managing about $8 billion, which was the largest pool of small cap growth money in the country. And had the stake in

00:07:12Walmart not been sold, the stake in Walmart would have been greater than the sum total of everything that I was managing. And I'm not saying people had made back. decisions before, but actually the math was one bad decision, or maybe you had to make that decision every day because the public markets are open every day, actually wiped out all these other good decisions mathematically than had done. And so what that caused me to do was at that point start to really study the history of the U.S. public market. Since then, I think a lot of people talked about the study that came out of Chicago. Yeah, the 4% thing. Right. And that's true. But at the time when I did this, no one had actually asked the simple question. In the history of the U.S.

00:07:56equity market, which is, to me, representative of capitalism, if there's 4,000 average public stocks, how many of them truly are great? And the philosophy we have today is predicated that over a rolling 10-year period, you have about 40 stocks that compound wealth at 20% a year, or grow up a little bit over 6x. So about 1% of the stock market are the valid of 20%. And that's what we want to go do. Like a lot of things in life, you get through looking at lateral examples, biology, and then you look at anecdotes. And then if you like to double click or you're maybe a geek on data, you start to really study it.

00:08:38And then obviously since then we've tried to create an investment philosophy that maximizes the probability of investing in those 40 companies. And the other thing that we have basically found out is that what's interesting is about 80% of those companies actually start their compounding journey as small cap companies. And so people always say, Henry, why do you love small cap companies? I was like, well, I love them because I love the people side of the job. But I also love them because 80% of them of these great companies actually start as small caps. That's what we're trying to maximize because we think that's what creates

00:09:20long-term wealth and economic growth. What we have done is basically purpose-built investment philosophy and just as importantly, try to purposely build an investment organization that can go do that. I want to ask about each. Your firm is literally named as an ode to this concept,

00:09:39durable, durable long-term compounding growth for the companies that you back. Give us one more click of detail on. after that original insight, so you've identified that you want to be in this group of 40 companies as best you can possibly approximate, what are the common elements that you've discovered that fit your personal and your team style that are indicators that you might have one on your hands? And I know you do late stage private investing as well, so you're looking at these companies when they're at or near their IPO. We'll talk about going public later on and why that's valuable.

00:10:09But what have you refined to be the most important signposts of a company that might be one of these 1% valedictorians? The first is, if you've been one before, you have a higher probability of being one again, which just sounds so simple, but is actually really interesting. We look at who is actually done it, and if we don't really know the company

00:10:35and we haven't studied it before, we'll go double-click and go essentially study it, see if there's an opportunity, but if not, go do a case study on it. So we want to go learn it. One of my partners, Anok Dait basically teaches a class. She's amazing. At Columbia Business School of the Valley Analysis Program.

00:10:54And partially this is our way of going back to school as an organization and partially it's our way of giving back to our community. But the class is based on this. And the students literally do about 6K studies a year. But over time, you build out a library of them. So I would say you just start by basically study. the ones who've done it, and then obviously trying to study the patterns of those who've done it. That's number one on how we do it.

00:11:21Second of all, if you go look at the data, they're diversified across the economy. So, look, we're in a period of time where what's going on in AI is so impactful. My view on the impact of this is probably no different than a lot of the other speakers you've had, I would say what I think about, when I think about the power of AI and really studying it, I don't only think about the companies that are the first or second derivatives, or maybe people who are categorized as technology companies. I also think about the existing diversified companies outside of the technology space that could be huge companies here.

00:12:01So as an example, when you go back and you look at the era of cloud and mobile, for sure you wanted to go on Amazon in that period of time. But actually, if you look at retail, once Walmart and Costco really understood what Amazon was doing but still had relative scale, they leveraged their advantages. And since they basically got on the same curve, 62% of all retail has gone to those three. So for sure, one might have been better than the other, but actually all three were good. what was the best Russell 2000 growth or for your investors

00:12:40who don't know benchmarks, small cap company over that 10 year period in the 2010s? Well, actually it was Domino's Pizza, which was a modest growth company, didn't average 10% growth over the period of time. Why was Domino's so good?

00:12:53Well, it turned out having gone back and studied Domino's from the beginning, but obviously owned the stock for some period of time, if you look at the pizza market in the United States, when Domino's started its run, you basically had a third of the market

00:13:09that was local. So probably like a lot of listeners, I have my favorite local pizza place and I like it because the pizza's great. And then the other third we know, there's the nationals, Domino's, Papa John's, Little Caesars, others. And then the middle third, there used to be in D.C.,

00:13:26this place called Armands that had about 30 places and they had local or geographic scale, but they didn't have the scale of dominoes and they didn't have great pizza. And what happened was when dominoes started this run, well, first of all, it started by basically making the product a little bit better.

00:13:45But if you talk to Patrick Doyle, who was CEO at the time and you really study it, what they started doing was, if there's three value equations in pizza, it's quality, value, and convenience. And what they realize is if we really, really invest in technology, we can make convenience a lot better. And so they really invested in their app,

00:14:09and they built a direct relationship with their customer. Very early on, they could then target that customer more efficiently with couponing, what have you, drive scale through that box. And then when you do something, well, you improve the product, probably was slightly above average, you really iterate on convenience, and now you have a direct relationship with those customers, all of a sudden, actually the brand Halo started getting a little bit better

00:14:35because people thought Domino's was with it, and it started to really help the brand. And you put all that together against a wonderful business model, the franchise business model, which is ROI light, you end up with a great stock. One of the things we think a lot about it durable is which of the companies that are in distribution, trucking, healthcare who are already good and maybe investing on a different curve have the ability to use

00:15:08AI to either substantially lower the relative cost advantage versus their competition, gain more revenue scale, and then reinvest that in a way where you create something that's permanent over the companies that maybe get to this late if they ever get to it. And often those are the best stocks when you go study the markets because you're already in a physical world business where the technology advantage transitions into a physical mode advantage or a distribution or scale advantage. That's one of the patterns we've observed. We call that a good to great thesis internally. The second way is people. If I think about the investments we have today, we tend to be in business with certain people we've known for 20 years now and maybe

00:15:56They're doing the same thing or maybe doing the next thing, but we think these are the type of people who build great organizations. And then obviously we have to meet new people, too. So one of our largest holding stays dualingo. So we first spent real time with the CEO Luis Van Awen when during COVID. During the COVID era, as the markets reopened, went to highs and the private markets were white hot in the zero interest rate environment. And people were meeting people on Zoom. I remember meeting Luis with my colleague Julio. We got off Zoom with Louise, like you often do back in the day.

00:16:35I called Julio up and I was like, what do you think? And he was like, well, it's a super impressive business. They're leading their market. They're on the right side of their consumer and the product's great. And I said, yeah, I said, Luis reminds me of Toby from Shopify. The last time I spent time with someone that technologically strong, Louise had been head of AI and ML at Carnegie Mellon, but also has that much business clarity

00:17:03and is so crystal clear at communicating that he can make complex topics simple that even I can understand them was when I spent time with Toby when Shopify was private. And I said to Julio, we're going to basically clear our schedule. And whenever Louise will spend time with us in Pittsburgh, we're going to go spend time with him. And so I think, for lack of a better word,

00:17:25the understanding of the patterns and having studied them, the understanding of what creates the environment, Sequoia is famous for saying, why now? And what could lead that not only on the technology side, but across the economy, but I think the clarity you have when you spent time with at this point thousands of executives and you have seen the ones who've done it, you want to do more with them. And then you have seen the ones who are trying to do it, but remind you so clearly of the ones who have done it. Can you say a little bit more about this notion of act two teams and management teams and why that is an interesting concept to you when you're thinking about the relationship

00:18:07between an act two team and a potentially very durable compounding company? This is something that is so dear to me because, one, it's something we invest in, but two, it's actually at the heart of durable itself. And it's one of the reasons I think durable is just different than other investment firms, because we ourselves were an Act 2 team. The best way to explain it is by example. At my platform, I invested in Workday when they were about at $100 million of revenue scale.

00:18:38What was so interesting was that the two co-founders of Workdale, Anil Boucherie and Dave Duffield, had basically been the people who had pioneered HR systems of record in the previous client server. world. They were literally the people who built PeopleSoft, scale PeopleSoft, and then a lot of history there, but there was basically a very aggressive takeover by Oracle. And so in many ways, they had felt they hadn't, frankly, completed their vision. So they came together, but what

00:19:12really also lit up the vision was cloud. Now, this sounds so obvious today. But 2012, when we investing in the workday. I think a lot of the understanding of the cloud was not as obvious by investors, and frankly, I'm not sure I fully understood it either. But what I did understand was this was an act two team. By that, I mean, if you understand HR systems of record, there's a bunch of the stuff you have to build into the product that, for lack of that a better word is exception management. and if you don't understand that exception management because you have done it before, you're going to not properly be able to do it. And because this was an Act 2 team, they actually knew how to leverage the modern technology,

00:20:04but also build the system of record in the way it dealt with the edge cases at super scale. And then obviously they also understood what segment of the market to go after and then how to serve it. That to me is the image we have as durable. When we look at an entrepreneur who has solved and successfully won a product area or an area of business, but now wants to go do it again. And there's huge advantage when you go do it again. You are essentially solving the same problem, but with total clarity at the beginning. The other thing is is if you've been successful, it allows you to align all ports of the organization, the people, the organizational structure, the investors, exactly how you want to go do it. One of the examples

00:21:02of that comes to mind is Max Levkin. A lot of people know Max, obviously, is one of the co-founders of PayPal. We first invested in Max, actually, was one of my first private investments in my whole career. We invested in Sly. And for many years until recently, we're now investors in a firm. I used to joke, I'm the only investor in Max, who hasn't made a lot of money. But with all jokes aside, Max, to me, represents the best of an Act II entrepreneur. For those of you who don't have the benefit of knowing Max, first of all, he truly understands technology. And he really understands how it can be used in very complex systems to solve problems. He can recruit exceptional people because he speaks their language. He's also a very good leader and people believe in him.

00:22:00He's also exceptionally resilient. We could talk a lot more about a firm and we could talk a lot more about the relationship with Max and some of the things about how you transition to the public markets later. But I would say to us, Max is a perfect example of an Act II entrepreneur that we had already been in business with. If Durable does anywhere from five to ten new investments a year, a lot of times it actually is with Act II entrepreneurs. And then if we're lucky, and this happens because of compounding relationships for having done this for 20 years, a lot of times it's with people that actually we were investors in their previous act. And I think that's also great because they know us and we know them. We know each other's strengths and we know exactly how

00:22:48we can help each other. The maxes of the world get to do business with who they want. But I think what it allows them to do is with a clean sheet of paper decide who they want to be a business with. But obviously, from our standpoint, we don't do a lot of new things. And it allows us to basically really align our resources to support them. What changed the most in your own Act 2? So as you structured durable itself, have the same features of the companies that you're looking at,

00:23:14investing in, last a long time, do really well, be tightly aligned, all these things that you're referencing. What were the biggest learnings that you took with you and that you jettisoned coming from your first act to your second act? I almost named Durable Act 2 Capital, by the way. Oh, wow.

00:23:30It was such a prominent view in what I was trying to do. We talked a little about the investment philosophy. I mean, the investment philosophy is really simple. That's invest in small companies that can compound over time and become large companies. And what's our advantage that we bring over other investors? We think we're great at people and understanding change. So basically, everything we do at durable, because we're an investment-driven firm, is in support of that investment mission. First of all, we, we, essentially with a clean sheet of paper said if we were going to go purpose build an investment vehicle to allow us to do this, how would it actually be structured? Essentially the percent of

00:24:21capital that we put in the public markets and the private markets is aligned against that. And then the second thing we talked about is organizationally, how are we going to go align against this. The way we think about people is very purposeful. We really believe that very few people actually operate the way we do. We think durable is just different. It's different because my partner, Catherine, who worked with me when we first underwrote Figma in 2020, and also when we led the investment round in 21, it was the same person who was at the all-hands meeting with Figma. when Dylan announced to the company that they were going public, and it's still the person that basically looks at the company

00:25:09when they announced their public earnings. I mean, that's just different. So you have to have people who can work with companies that are valued at $2 billion, and they're private and have $30 million of run rate revenue, and now Figma is a billion, two companies, a public company, and can continue to work on that. And investment firms aren't structured that way. So if you want to have people who can do that,

00:25:32You've got to develop them internally. Second of all, it's time allocation. In general, at any point in time, we probably have 10, 15% of our capital in the private markets and the rest of the public markets. But we have to be willing to spend the appropriate time on new ideas. So when we look at Duolingo and the right decision for Duolingo and maybe the right decision for us is only to invest $20 million. We don't look at it as a $20 million investment on a $15 billion vehicle. We don't look at it as 10 basis points or 12 basis points. We actually look at it as our future compounder.

00:26:12Our investment memos are just fundamentally written different than other investment firms. When we look at an early stage growth company that is not already competitively advantaged, we write the memo that says his du lingo does what we think it can, over the next three years, not only do we make a fair return for the risk of the company, but at that point of time, we would want to buy more at these higher prices. And if we can't write the memo that we want to buy more at higher prices, we can't buy the shares, and our thesis can't be, it gets bought, or our thesis can't be, it'd be a great talent acquisition by someone. So that has to be aligned. And then the investors were in business a week.

00:26:57We have incredible investors. We have to be transparent with them that in order to pursue this philosophy, we're going to have what people would say is monthly or quarterly volatility in our performance when they look at our performance. And that sounds so obvious. But increasingly, the market has changed where capital is short cycle. So many people are in one month, basically, in Senate models, not even yearly one month. And so we have to have been very transparent with our investors. and told them what we're trying to do, deliver on those promises,

00:27:32but deliver on those promises over the right period of time. I'm so intrigued by this dollar cost averaging up concept that you're not willing to invest in the first place if you're not excited to, if it goes well, invest more at higher prices. Is that the right way to think about it, that the way you build a position over time

00:27:47is investing more as the price goes up to build your fulsome position? Yes and no. So there's really two parts of our portfolio. When we're looking at what we call early stage growth companies, and it could be duelingo as a private company, or it could be duelingo after it goes public, but it's still not competitively advantaged. In that point in time, it didn't have cash flow. It didn't have PE ratios. We still, in our view that as an early stage growth company, where we're saying in the future, it could be competitively advantage. The operating culture could be clearly established where we could look back and see the excellence of it and the,

00:28:26adaptability of it. And then we could look at the growth formula and really understand it. And obviously along the way we've really believed these are our kind of people who could scale organizations. So when we look at something like that, we have to believe that when we look at the three plus three, we're underwriting it on a three-year basis in general, not always. If it does what we think it can, not like it will. And I'm going to speak to that in a second. We would then want to buy more as it in our lexicon gets bigger, but also de-risks, and then proves to be a competitively advantaged business

00:29:05and shows more resilience and shows the ability to financially balance growth, profitability, innovation, basically prove its ability, in the case of DOLingo, to become more of a power app, teaching speakers of foreign language for more self-improvement,

00:29:21that it starts to do it for learning that basically increases educational ability to participate in the economic world. They're obviously going to different subject with chess. So as you progress as a business more towards what we view is competitively advantaged business that's, for lack a better word, baked, but still has growth. We underwrite those with a view that if it does that scenario, we would want to buy more. And if not, we just can't get involved.

00:29:48Now, of course, in my career, I've invested in over 100 private companies, and I think I've been involved in over 50 IPOs. How many of them do we still own? Well, we probably still own more than anyone else in the markets. Even if I look at durable, among our largest positions in the public markets are DoorDash, Affirm, Toast, Now Figma, Warby Parker, and we led those last private rounds. They persisted and we bought more at different points on the curve. I would say on a durable growth company because of market volatility and this agency principle that I think about that's forcing people to have short cycle view of the public markets, actually probably you're buying more of them when they're down. One of our favorite entrepreneurs is a guy

00:30:35named Jay Henick, who essentially is CEO of Colliers, but he was also the founder of First Service. And we own both of them. We're actually involved in a private investment with him also. back to Act 2 entrepreneurs and also our belief that we do business with people and we're really good at people and good people do sometimes multiple things well. And look, in the case of Colliers, I think it's a very misunderstood company. I think for sure the brand suggests it's a commercial real estate broker. Commercial real estate brokers don't do well in general when interest rates are high. That was the case last year. But I think what's misunderstood about Jane, he's done this time and time again, is because of his understanding of he was really a disciple and his mentor was Peter Drucker, his understanding of local incentives and his sharpness of capital allocation and the way he sets up the partnership model when he buys people.

00:31:35What people haven't realized is he built an incredible business, both in asset management on the real estate style in Harrison Street, and also he's building a terrific consulting platform. I think our insight there is starts with J, but it starts with understanding actually the asset quality of colliers is not the quality of a commercial real estate firm that's cyclical. It's actually a really good real estate asset manager emerging really strong consulting firm. So last year, when people were worried about the weak commercial real estate market and interest rates, we bought a lot more of that company. It sold off based on short-term macro concerns.

00:32:22So in that part of the portfolio, probably we're buying more of the companies when they go down. You said something really important and interesting that I'd love to dive into, which is the principal agent problem. And my question is a market structure question. We've talked before about some crazy percentage of just marginal volume that happens inside of the platforms,

00:32:41the Citadel's, Millenniums, Ballyas, and these 0.72s of the world. How do you feel that? And I'm curious just for your thoughts on changes to market structure in general, since you've been doing this, how it contributes to that volatility, what opportunities it creates, what dangers it creates. I started thinking a lot about it two years ago. And in hindsight, I probably should have started thinking hard about it three years ago.

00:33:02You don't get everything right. There was a period in my career where the quant funds really started to do great, the two sigmas of the world. One of the things we really stress it durable is humility. So we never look at a problem and assume we're right and the other person's wrong. And we never assume we're good and the other person's bad. We actually look at things and assume the other person's really smart and what can go learn from them. And so this relates back before I found it durable.

00:33:34But I went and I studied the quants. And what I concluded was the short-term alpha. a game is probably going to be won by the machines paired with the humans. At the time, it was when, for the first time, computers paired with machines could beat the best human chess player. And this is obviously when I went to spend time with the principal at 2 Sigma. I learned he was doing exceptionally well. But anyway, I got to know him and we talked a lot. And I realized, actually, there were real limitations to what the quants could do. I started realizing if it's a repeat actor problem based on known data, actually, the quants are pretty good.

00:34:19So what does that mean at the time? Well, it means is if you're just a person who buys an industrial company because the PMIs down and historically when the PMI re-rates and gets better and you make money, that's not going to work. The machines are just going to be better at that view. But if you're like what we were at the time, people who are really good at understanding people and really good at understanding change, that was really advantaged. And I basically, at my old firm,

00:34:48I did an internal teaching on man versus machine. And I said, as a result, what the New Horizon Fund is going to go do is we're going to go double down on these two things, and we're going to get better at them. We're going to get more focus on what we do on the people side of our business, both in the public and private market,

00:35:10and we're going to get more focused on where change impacts both our early stage growth companies and our durable growth companies. And where we're investing, where we're not advantage versus these machines, probably shouldn't have done it anyway, but we're going to stop doing it. But we did it, of course, all within our investment philosophy. And that's basically what we've done at durable as we've gone and studied a millennial and citadel. First, let me be very clear, deeply respect those organizations. I think they're great at what they do.

00:35:46And I actually believe the people who work there are very talented. And we start from the view that these are exceptionally talented people who are actually very good at what they do and are high-quality people. But what we have said is what do they do and what is the limitation? And one of the limitations is if you work at a firm that deeply measures your risk every day. And then if you have a bad period of time measured by a month, but certainly three months, you get your capital cut back. There's a good chance you get let go. It probably means you can't have a time horizon longer than your career horizon. What we also have noticed,

00:36:28because we not only understand things anecdotal, we also study them, if you look at the last public market earning season, which was companies reporting Q. to this past year, if you study earnings volatility, it was more volatile than any earning season since the financial crisis. Even though during the financial crisis, as we all know, the fundamental banking system of the U.S. was under question, which meant the economy and the markets, as we know it, really had a wide dispersion of opportunity. And the markets tend to be a lot more volatile when they're making lows and making highs. And yet, this was the most volatile earnings season. I think the reason for that is just basically the fact that we estimate

00:37:14somewhere between 80 and 90 percent of the institutional flow is driven either by the firms that have one month and three-month agency or the quants that have to take these price signals into account, and then their models are optimized for this. And so what we have said at durable is really simple. Let's go do less so we can do more. Because if we're going to accept volatility in stocks, we have to really understand the business and the people like we do at Colliers, such that if Colliers is down because people are worried about commercial brokerage, because of interest rates, actually the markets are probably right. They're probably right 90% of time.

00:37:55But if we understand what's unique about that culture, how they allocate capital, we understand deeply how the quality of that Harrison Street is, because we've studied it for 20 years and we know that people who run it. Well, that's a reason why we're willing to lean into that stress. The same thing, when I look at our early stage growth portfolio, I spoke about dualingo earlier. They came public the last time the capital markets were really open to companies, which was 2021.

00:38:26And there's been a lot written about the 2021 IPO class, how they came public in a zero interest rate environment, and so many of these companies, actually were going to have a tough time getting to profitability and his interest rates went up in 22, I think correctly, a lot of people said, actually, just throw them all out. The average loss making company in 2022 in the Russell 2000 growth went down over 70%. Our view was, makes sense. The market's probably right. But not all of these can't adapt. Not all these don't have businesses that are good enough to make real economic returns. Our view is not all of these

00:39:09companies didn't have the discipline and the organizational fortitude to transition and become successful companies in a world that actually required profitability based on the change of interest rates. Doolingo is an example of a company that we actually bought more of in 22. And there's an example of an early stage growth company that we dollar costs average down. I think we're advantaged in because if you're rule-based in what you do or you have a one or three-month time frame, you just can't own Duolingo. You can't own more call yours. You said people and change. We'll talk more about both. But starting with change, we're in the midst of probably the biggest technology shift or change, maybe that any of us will ever see. You've invested and lived through several others, internet, mobile, cloud. Can you put this one? in frame of reference with the other ones that you've lived through, and you mentioned so many times studying the past and studying history and seeing patterns, what patterns do you think might apply this time and what patterns do you need to throw out

00:40:15and re-underwrite from first principles here? So I started writing about AI and our shareholder letters in 22. And at the time, I said, having seen Internet, cloud, and mobile, this is going to be at least as powerful as Internet. And I said, we're going to go approach this with humility, go spend time with the people who are closest to it, and constantly be learning. And then I also said, Durable is not a thematic investing firm or a compounding investing firm. So just because we think something's going to be big, doesn't mean our investment meetings aren't going to be, AI is going to be big. Let's go buy AI companies.

00:40:52It's going to be, let's really understand change and then understand how the companies that we invest in are going to benefit from it or, become better by it, or at least not get disrupted. I personally, and I'll lay out in a second, think it probably is more impactful than the internet was. It's not only going to affect every technology company, which you see in the markets, but it's also going to impact, in this case, I think almost every company that needs white collar employee and IP employee to drive their work. So let me start with the second one first, because I think less people have talked about that one. As a student of business, I think that by the end of the 2010s, everyone knew that if you were a product-based business, you needed to understand your China cost.

00:41:41It was on the cover of every business magazine and then every popular magazine in the tens. And all that meant was in a global supply chain, if there was a part of the world with huge scale and resources like China in the Far East that could make product. substantially cheaper when you landed it by your factory or to the consumer, you had to understand it. And if you didn't leverage it yourself, you were going to go out business. That was the first derivative. The second derivative is actually there's a lot of businesses that are spread businesses. You look at a lot of distribution businesses as an example. If you distribute, you're going to talk about a great business like HVAC, the industry tends to put a spread on the raw material.

00:42:29If your HVAC unit basically inflates at 3 to 5% that's good. And if your HVACD deflates at 3 to 5%, that's bad. And so if you were spread business on top of it, that was problematic. Every company that was product base or derivative product base had to understand China costs. And I think the same thing applies to AI. But I think it's not product base this time. It's IP base. So let's go back to Max as an example.

00:42:56affirm most people would think about, and correctly so, as a fintech company that empowers people to get access to credit in a safe way and actually a pretty compliant, friendly way with no tricks. And he's doing even more than that now. But at the end of the day, because he is regulated, he has a lot of legal cost in the company. He's got hundreds of thousands of contracts with merchants. He's got to monitor his partner as. on how they communicate credit. And that just requires a lot of people.

00:43:31If you talk to him, and he's taught publicly about this, he's got great belief that a firm can grow at the rates that's growing at for a reasonable period of time. In addition, they can do it without adding headcount. And the reason for that, obviously, he's going to go lean out a lot of processes that were not possible to go do before AI. I'll tell you a really funny story with that.

00:43:55So I talked to him one day after reports earnings. And he explains to me, you're always asking me about how I'm using AI to become more efficient. I feel like I was late to the curb, but I finally figured it out. And so he says, I have this team that goes around the company and understands processes. And we start from not a cost standpoint, but we start from a leaning out standpoint. And I think I'm making real progress there. And that's why I'm able to make this public pronouncement. He's like, this is this great.

00:44:23I say to Max, why don't you come to D.C. And let's go see Mitch Rails. Because Dan O'Hur, who he and his brother started, and he's chairman of, has been doing this for 40 years. It's called DBS. And they basically brought Kaysan back to the U.S. And they started. They're obviously more of a health care company now by going into factories, putting processes up in whiteboards, studying how they could lean them out, leading them out, and coming back in

00:44:59a month later to make sure, because change is hard, that the change is held. And then they basically built a whole business system, which has basically not only helped build Danaher, but there's over a dozen Fortune 500 CEOs in the United States who started their jobs at Danahar, including the guy who just have turned around GE. So since you're so excited about this, let's actually go to the Godfather in the United States. The reason I say that is this is just so profound. It's even hard to get your head around. Mitch would say for 40 years, because at China,

00:45:32we've been able to really lean out product-based businesses, working capital. But in many ways, I feel like we're just getting started on processes that are done by humans. The second example that I'll talk about, and I'm talking about things that haven't been talked about as much on this show, When I first really understood what was going on the internet, I ran a global TMT fund, and my largest investment was Amazon.

00:46:01We invested in that one. It was a $10 billion company, so I used to go to Seattle twice a year. So interesting to the things you remember, because it was far from Baltimore. No one would come with me, and it was a small company, and people thought I understood it, and I used to go, I've lunch twice a year with Jet Bezos. At the time, I worked for the firm that was his largest outside shareholder, and it was obviously my research position for the firm. I learned so many things from those meetings,

00:46:28but one of the things I learned is the very best businesses that leverage technology, leverage it in a way where they use it to lower costs and drive revenue that result in them gaining 30% or more incremental market share in their end market. And then they take that unit economic advantage

00:46:52and they reinvest it in something that is persistent, even if their competition were to wake up tomorrow and do the exact same thing with people just as good as they are. And to me, that's one of the definitions, a durable of a competitive advantage, is if your competitor does a competitive mode attack doing the exact same thing with people as well, or doesn't matter because you're too far ahead.

00:47:21And as we all have come to understand with Amazon, they took that three to five percent cost advantage of getting that box to you and their ability to put more than one item in the box. And they use that economic advantage to then go build fulfillment centers that are physical to reinvest into capital and infrastructure that allowed them to go down that three to five percent cost card for 20 years. As I said earlier in the show, they woke up and the only people who could play their game when eventually everyone realized what they were doing were the people who still had the scale

00:47:54and the customer relationships and the trust of Walmart and Costco. And then eventually when they figured out all three of them were great. Now, the problem is the rest of retail was not so good. That's what we think about here. So if I say it back to you, we've seen through Mitch and others like him

00:48:11this 40-year benefit of Kaizen brought to physical product world and that AI represents a sort of kickoff. of Kaizen to human work world, and that that is going to have lots of stories like the Amazon story you just said, where someone gets on one of these curves early and they can't be caught. And so you're trying to, I'm sure, to find who those people might be. So we're trying to do two things. We're trying to find the people who that might be.

00:48:38And then we're trying to make sure we don't get killed by them. Mistakingly own a company that based on last generation competitive risk was a great company. And correctly, we thought was competitively advantaged and had a good operating culture. It was led by high-quality people who thought like owners. But because discontinuous change changed the world, they weren't able to adapt. Now, ideally, what we go do is we go find those already advantaged companies. And then they leverage this to go from good to great. If you think about all the people that have navigated change as CEOs the best that you've worked with,

00:49:18I'm an investor with Dave Duffield in his latest company, and so he comes to mind because now he's tackling AI and the guy is incredible. If you think about whether it's Mitch or Jeff or Dave or people like this that you've seen operate, what methods have impressed you the most of how they themselves adapt, first, their own mentality and then their teams to these fast-changing circumstances? And this is a question for everyone out there that's running businesses that is facing this same change that's at risk and an opportunity at the same time. Let's go pick on Luis. We talked about Luis earlier. Dualingo has a lot of opportunity with AI and a lot of risk. And the stock, depending on the day, reflects it. When Open AI demos how you can use Open AI to basically do translation, a lot of times the stock goes down.

00:50:05Or when Apple shows you how AirPods can be used to in the physical... Live translation. Live translation, the stock goes down. And actually, I don't think the markers wrong. Now, it's probably wrong in the magnitude, but I think what the market is saying is there's a risk. There's a risk here. So that's probably in our portfolio, one of the higher risk names. But what do we look for when Luis or Max or Dave Duffields?

00:50:31I think the first thing we look about is a business that already is operating well. Because if you're not operating well, when you have to deal with change, you're not going to be able to do two things at once. can't do a turnaround and do well. I think the second thing we would say is a business that already was winning in its first end market. All the definitions we would have about winning, substantially gaining market share, driving real economic profit that allows it to reinvest in this next S curve. And also, the other thing we really care about is people. We really stress resiliency at durable. It's one of the reasons we like so much investing in Act II managers. We can go study their resiliency. When you're an investor in Max and you saw how resilient he was

00:51:30in Slide, and now you understand how he's got to be resilient to implement AI to lean out his cost and drive his revenue before his competition does, you're like, we've seen him under stress before. I think you're looking for people who have a perspective can execute, but also are humble because we, a durable, write down our views on AI every six months and we update them. And as we've gone more into this period of change, probably we're less wrong. Our perspective is more informed, you would say, than it was as we change it every six months. But we're learning. We have the benefit of having a job that allows us to spend our time reading and thinking and talking to smart people. So even if these are really talented people, most likely they don't have as much

00:52:18time to go do it as we do. And we have to be very humble in our approach. So they have to have a perspective, figure out how to go do this, not be paralyzed, but they also have to be humble and constantly learning. And the last thing I think practically we have to think about as investors is backs to the memo. If you have a higher-risk situation, which we would all read dual-lingo is and firm is, and you're really close to that part of the change, then you need to be compensated for the risk. And so what we would tell people on Duolingo is, yeah, like because of those risks, the discount rate has gone up.

00:52:51But probably commensurate, the opportunity has also gone up. We can articulate it. Luis has talked about being 20x-Faxter and generating content. We've already seen it. He's publicly said he developed chess, which is doing incredibly well. And my kids really love that product. I mean, they're addicted to it.

00:53:14First, it was two people for six months, and then he added another four people and he developed a product in nine months. That's the best product he's ever done. And if you ever talked to him, how long would it have taken the past? He's like, I don't know. I probably need four to six X as many people,

00:53:26and it would have taken them four times as long. And so you could say a startup could do that, but he's doing it. He's doing it on its platform. That product is well over a million. and is growing at astronomical rates, and it's a great underserved end market. It could be a huge business. And so, yes, the discount rate has gone up, but this company was purpose-built for AI.

00:53:50You actually have a person who studied AI and taught it at Carnegie Mellon, has an organization of A players who are agile in his company, and is humble and constantly learning, a proof point on how it's making him faster. than other people. It's driving real value. And obviously, that means the probability of it going from a point solution, a couple of products that's sweet is higher. And so that's what we look for. Can I stack a couple of the things that you've said that interest me the most into a bigger question? If I take physical Kaizen and digital Kaizen just to shrink the concepts down, if those were to have a kid, it might be robotics. And so I'm really curious how you approach the potential,

00:54:36with an unknown timeline, that we might get a second wave of the physical labor economy is way bigger than the digital labor economy, that we may get a second application of Kaysen over the next 40 years. The first one we saw from Mitch and company, how do you think about that opportunity and potential change? It's something we have really thought hard about. Here's what we have tried to do. First of all, we have tried to get smart by meeting with the entrepreneurs and talking to the companies that were involved in that we know that are leading this area, just to try to learn.

00:55:13We only recently did this with robotics. So if we started writing down our conclusions and then being humble that it could change every six months in AI, in what you would say is more data businesses or digital businesses, we only started doing this literally in the last month where we documented it for the first time. I'm going to do something that I don't love to do, which I know our views here are very early and probably deeply wrong, but I'll give you our initial conclusions, which is, in certain use cases, it's pretty clear that already the cost is lower than the equivalent analog process or physical labor process.

00:55:56And yet, as we all know, this is the earliest and worst robotics going to be. and because machines are iterating with machines and is being powered by general purpose models, not by specific purpose models, this is riding a curve that is definitely geometric. And so back to this mental model of Amazon that drives so much of what we think about durability, what Amazon was able to do is ride a cost curve

00:56:23where they were deflating the cost of sending a box out at three to five percent a year for 20 straight years. And the people who did not leverage the right distribution infrastructure, the right investment in robotics at that time, they bought Kiva, the right ML models when they came into play about how to basically plan inventory and deal with suppliers actually were probably at a curve that probably inflated at three to five percent, but at best were flat. And that differential in a low margin business, you compounded over five years.

00:57:03Honestly, that's all you need to know. And that's, I think, what we're starting to get our heads around at durable, which is if in many areas, robotics is at parity, now there's a lot of data that says it's lower cost in certain cases. And the use cases are about to go up. And the cost on the existing use cases probably don't. go down at three to five percent at this point in the curb because of the scale brought in, the human capital brought in, the IP bot on, and the fact that you're going to be able

00:57:34to use these general purpose LLMs to power it, it probably goes down at more like 15 to 20 percent, but maybe it's more as law and it goes down even faster. Well, then we wake up in five years and the people who put themselves on one cost curve, if they compete against the people who put themselves on the other cost curve, those could be power law businesses. What we have thought really hard about is who's going to go benefit from this curve, where they're a competition, even if they woke up tomorrow, even if they put the same amount of money into this problem, even if they could hire the same quality of people,

00:58:12which is unlikely, because they have not invested in the distribution infrastructure or the technological infrastructure to compete on this curve, at minimum is probably two to three years, behind and every day that they wait, they're probably getting further behind. It's apparent to everyone a durable why our understanding of change has been great for our investments in duelingo and a firm and Shopify. But actually, I think it's about to be really advantaged our understanding of people and change as we go invest in the other 70% of the economy.

00:58:53If you think about all the businesses you backed, do you have a favorite kind of of competitive advantage, of source of competitive advantage, so much about your whole process is, does it have it already? Is it on its trajectory to get there? There's different kinds, scale, network effects, et cetera. Are there favorites that you find yourself returning to as the best sources of long-term competitive advantage? I really love two, and they're actually quite different. I love physical real estate. I love Amazon or we're investors in Carvana, love their reconditioning, et cetera, because at the end of the day, you can't spin those things up. You can't spend those things up. These things that are super messy, you've got to acquire the land,

00:59:37you've got to put it in the right place, you've got to build the right network, then you've got to go stand it up with the right capax and the right systems, and then you have to have the right operating culture. This is really, really hard. If you put your real estate in the wrong place, then your cost of transport is more expensive, and this culture you've got to go build there super hard. So I deeply love these physical world motes that exist. And really, our portfolio has a lot of them in one way or the other. And that's why when you and I talked about robotics,

01:00:12my mind went to distribution. It's like, where can robotics basically take already advantage businesses and make them more advantage? The other thing I really believe is these soft things that are incredibly hard. I think about the example of Dan or her so much because what Mitch and Steve have done is stunningly hard to imagine that for nearly 40 years, you've compounded wealth at 20% in something that didn't have deep physical modes or didn't have data network effects, like a metamite or Google have

01:00:53or the people who believe deeply in open AI, those data network effects are amazing. But the ones where you're really sharp on human capital, you're really sharp on what talent really means, not the sticker of talent. You're really sharp on your operating excellence, the culture of it, the constant improvement of it, the system behind it.

01:01:18like Kazan. And then you allocate capital against your businesses to really hold them accountable. I think it's amazing. In our portfolio, even though if I were to walk you through the businesses that First Service is in which Jay Hennick's chairman of and what Collier's had is where he's CEO of, he's the largest shareholder of both, none of them actually have these super sharp competitive advantage. But yet, if you really have studied Jay

01:01:54and you truly understand his human capital culture and how he basically attracts and hold people accountable and his ability to basically decentralize incentives. So people are aligned in businesses, everything from residential management of condos,

01:02:18to roofing and restoration, and then how they allocate capital, how they sell things that don't have a path to be great, and how they buy businesses, but they do it in a way where it actually aligns incentives and consummate with them. It's just super impressive.

01:02:38The other thing is if we're going to invest in small companies, those companies by the time they form them tend to be pretty large. We have to be pretty sharp at really understanding other. competitive advantages. You mentioned memo a few times, the memos you write internally. What have you learn makes for a fantastic structure of an investment memo? What works for you? We're a writing culture because at the end of the day, human beings are innately human. When we are involved in something,

01:03:10it's very hard to have that executive distance that you need to do to really hold yourself accountable to what you thought and actually hold the companies accountable to what you would like them to do, especially since we really do know the people we invest in and we invest in really high quality, interesting people, and we're deeply rooting for everyone to succeed. Unlike a venture capital firm or private investing firm, we have to be able to understand when things aren't working out so we can sell them. But just as importantly, if we're going to go invest in something that has real risk by Duolingo, we have to understand when things like Duolingo are really inflecting,

01:03:55and maybe we see it other people who don't do, so we can go buy more of it. So we got to be able to do both. When we write an investment memo, it's in service of our investment philosophy, making sure we've done the work and we can clearly articulate, why is a company competitively advantaged or will it be? what would it have to do? Why is this operating culture excellent or why does it have the seeds

01:04:19of an excellent operating culture? And why does this leader think like an owner where they can basically make the business better, which we define as gaining market share through cycle? And we think that they can allocate internal and external capital such to both drive more durable growth and also make their asset base more valuable over time.

01:04:43That's our investment memo. But then just as importantly, through both modeling, but clearly spelling out what we're tracking, we have to then be able to, when we do our quarterly, what are really our operating reviews at Durable, where we go through the entire portfolio with the entire investment team on every single investment, we have to look how actually the companies are doing against what we thought they would do. And then every single investment at Durable, if you're going to be able, if you're going to if we own for three years, we actually do a three-year look back on what we underwrote and what it did.

01:05:19And that one, like so many things in your career, you wish you would have known earlier. The great thing about investing and the great investors to me actually are better at 70 than they are at 50. And hopefully, I'm in my 50s. I'm better than I was when I did this at 30. And you just learn. You understand patterns better. hopefully you remain humble so you don't actually get too stuck in your ways. You surround yourself with smarter, better people, both internally and externally.

01:05:49But one of them is you did develop better processes. And one of the process that we always started two years ago was we always did quarterly KPIs or operating reviews, but we didn't go back and look at an investment that we own for three years and just say, and when we do them, they're so simple. We say three years ago we thought they would do X and now they did Y. Now, of course, the conversation is, where was it different and why? But actually, the preparation for that meeting is, at least on the written side, is so simple. It's two sides.

01:06:24But then, of course, we're all human. And even though we try to hold each other accountable, if you get together every quarter and something deviates a little bit, you tend to excuse it. Of course, if it devades a little bit for 12 straight quarters, actually, it's still staring you in the face. That's why we're such a big believer in investment memos. I think in 2022, you went and did a tour talking to CEOs about the state of the market and operating principles and things like this. I'm curious to hear you reflect on that tour, but even more interested to hear if you were to do a tour of every CEO in the portfolio today,

01:07:02and maybe you're doing this actively, what the message would be today that's different than the message was in 2022? I felt in 2022, we truly, had expertise to add to the conversation. And that was we at the highest level, and by the way, I don't say we versus us, we all, every CEO I talked to, every investor I talked to, and even durable, who is a fundamental investment firm that really values stuff on cash flow, never felt money was going to be free forever, had made simplifying assumptions based on almost a decade of free If anyone who has been taught how to value companies understands at the end of the day, all companies have to be valued on free cash flow and organic growth.

01:07:53At the time, we got to a point where 30% of all treasury bills in the world actually had negative yields. And relative to inflation, you were being paid to borrow, which basically means it was logical for venture capitalists to value companies and not care about. profitability at all. It was logical for companies in the public markets to buy low-quality businesses that could never own their cost of capital, but use cheap debt to go do it. It was logical why if you sat on companies' boards, you really wouldn't ask hard questions about trading off growth, profitability, and innovation, because you didn't have to. And if you go back to the conversation we had

01:08:39when we eventually studied compounding, we went back and we ran that study in periods, we looked at the public markets and we asked ourselves a simple question in the world of positive real rates, which is the entire history of the U.S. equity market except for that short period of time, which I don't know where I will see again.

01:08:58There's on average about 40 compounders, and during the period of time of free money, there was 120. So it was three times easier to do it. And then we asked ourselves, a simple question, what patterns only exist when money's free? So not surprisingly, everyone would imagine the pattern of driving growth and profitability is perennial and it actually works regardless whether money is free or not. The other thing that was really interesting,

01:09:27which was really important to us and gave us confidence to go buy more of the duolingoes in 22 when we did this work is that if you're a small company, you don't have to be gap profitable. And you don't even have to have an ROI that is above your cost of capital, but you do have to show progress in your path towards it. And then what doesn't work? Well, a company that doesn't earn financial returns and is showing no progress. And the other one that doesn't work, which we don't do a lot of, was go buy a low quality return business at a high price but leverage really cheap debt. So I felt strongly because we had seen cycles before and because we truly had expertise and also because we're really our companies that we invest in a long-term partner,

01:10:17we want to invest in companies that are private and still own them with their public. We want to help them as transition. I thought we had expertise in a perspective that many people had not gone on before. And so to reference what this meant was we had these conversations with a number of our companies that were in this situation. And so we had some version of this conversation with Amman at Toast, with Luis Adulingo, with Max at a firm. And all of them were a little different.

01:10:49As an example, with Luis, I had dinner with him and the CFO, and his CFO is very talented, just like he is. And I just presented them the data, knowing them, I knew they would have a lot of questions. on it and they asked a lot of good questions. The other thing I said to them is, look, Louise, when we invest in your company, one of the things I always ask people is, we'll articulate what we're looking for in you, but what are you looking for in us?

01:11:14And one of the things he said is, I'm going to be a first-time CEO. And my sense is you're going to see things based on your experience that maybe I don't see because this is new to me. And I said the reason I wanted to have dinner with you is not because I have all the answers, but I have a strong view that you're dominant in what you do. AI is amazing for you. AI was just getting started. You have a very unique human capital culture.

01:11:40But if you're going to communicate to people this strength in the market, it doesn't mean you need to get to your long-term margin targets at 30%, but you have to show progress towards it. With other companies, we restricted the stock. We spent more time with them. we helped them understand what this means. We even helped a bunch of them think about how to communicate what they were going to do in this path of this transition to their investors.

01:12:07That to me is different than where we are in 2025 because I felt we had real expertise there and something to add to the conversation that a lot of these executives hadn't seen before as operators and, frankly, many of their board members had come of age in a period of time where money was free and frankly probably hadn't been involved as many durable companies as we had been involved in. So the answer is I think probably one more back to learning and normal interaction than we are

01:12:41having a perspective that we're dying to explain to people. I heard that in their early T-Roe days that you were studying media and you studied 20 or 30 years worth of media history and condensed it down to a very small three or four-page report. Can you bring us back to that study in what you learned about media. I'm obviously interested in media. I'm curious what you learned then about media and how that has evolved ever since. I tend to want to do this. I always believe that if you really understand something, you can make it super concise. And where we are with robotics and less so with AI, our internal memos are probably too long because, frankly, there's too much unknown, and so we can't be concise. I was very lucky in media. And it's something we try to do it durable with people,

01:13:26because I was an outsider to the media industry, I think I brought fresh perspective to it. When I was assigned to be a media analyst, this is so hard to believe, but the companies that were viewed as the darlings of balancing durability in terms of competitive modes and having strong growth were companies like Comcast, Time Warner, Disney, Viacom.

01:13:53I did a bunch of work. work on the companies individually. And then I started to really think hard about it. And I started to realize that the best businesses inside of all of them had been the cable networks. If you read about media back then, the entrepreneurs that became the most famous were the ones that launched cable networks. John Hendricks, Ted Turner, Bob Johnson. By the way, John Malone basically backed almost all these people, but the most invested. So John Malone was at the center of all this. For 20 years, cable networks grew 20 percent with 20 ROEs, so they were compounders. And that's how you had all these entrepreneurs that had become billionaires. And that's how you had media

01:14:41companies that really fought over a balance of content and distribution so they could all get their fair share of these economics. And then when you went and you looked at a bunch of the other industry, it was like an average ROA business. And that was what the whole industry was. But the whole thing, if you really thought about it at a systematic level, was predicated on a closed system, which is so obvious today. What the closed system was predicated on, I'm only going to show you the product or the TV show that you most want to watch when I can make the most money, when you want to consume it. Even in a world of linear TV, even though the most, people watched TV on Sunday night.

01:15:25The worst shows showed up on Sunday night because people had spent their money on the weekend and they were going back to work and they weren't going to go shopping and go out. And the best shows showed up on Thursday night, Friends, the Cosby Show. And in the movie business, obviously, there was windowing. I was like, okay, so the best business is cable networks.

01:15:44That's why we have this fight over content distribution. And then it's all predicated on this closed system. What I believed at the time, which obviously proved to be true, was that this TMT bubble that had burned so many investors and no one wanted to think anything good could come out of at the time. It had laid the seeds of the end of the durability of that industry. Because even though people lost so much money on telecom infrastructure and laying the seeds of broadband, what brought up. Rob-Ban was enabling eventually was things like YouTube and Netflix, which would break down this whole company, this closed system that was run like an oligaw boy. That's what my memo summarized was the riskiest thing is to own the durable asset, and the

01:16:38safest thing to do is go by the next standard. I mean, lots of people say investing is an apprenticeship business, and you yourself have said the best investors are better at 70 than at 50 than at 30. I would love to hear a lot about what you've learned about selecting great people when you don't know them as well and then making them better as part of durable over time because that's going to determine how well you do as a business. So it's a critical component. How do you do it? One of the major goals I had when we started durable was to actually build an investment firm that would be better the day I left and the initial partners left than when we were the best while we were there. So I thought really hard about that. It's a hell of a goal. I went on a listening tour and I went to see firms that had a period of greatness

01:17:27and some of them didn't get it done. And then some of them actually accomplished that goal. I learned a lot in that. Part of it is how we have structured durable incentives and the whole ethos we have internally. But it was really a reinforcement of this goal about people. You spent time with our team. When you look at the senior people durable, Anuk Day, one of my partners, incredibly talented

01:17:58woman, she started working with me at 26. She had never worked in the investment business before. She had finished her master's at Oxford, and she was working at a nonprofit. Corey Scholl, he started working with me either 21 or 22 right out of William and Mary. And then we have a host of other people who came out of liberal arts, not rigorous. I had to work at a bank and an investment firm or any time I interview with people, I have to tell people since I was five, which is basically what you have to do nowadays. Go work at most investment firms or banks.

01:18:37You've got to tell people that ever since the age of five, I wanted to do exactly what you're doing. But all jokes aside, we really believe that you have to be. to be an expert in what you do, develop into it. There's a whole matrix we have about the development of security analysis, excellence, and how is the journey? We do our reviews based on it. I tell people, look, on this sheet, this is a journey. I'm probably the most experienced security analysts at the firm, and I still have a journey to go here. I got to get better. And then we also believe at the same time that the youngest person in the room on our investment team actually can have the most valuable perspective. So we have an investment team of 12 people.

01:19:19And in my career, a lot of times the best insight comes from the most junior person who's looking at something with a fresh set of eyes. Early in a Nook's career, when I was looking at consumer companies, she really helped understand a millennial mindset. And then we did a lot of work against it. And I think that led to some great investments, both in the public, private markets. We were private investors in DoorDash, Sweet Green, Warby Parker, some of the leading companies of the day. Anyway, what do we look for? We look for deep intellectual curiosity. If you don't want to constantly learn, that's just not who we are.

01:19:56We want people who really want to learn. We want people who compete, but want to compete as a team sport. We have a lot of athletes. We have a lot of people who work their way through school financially. we want people who are resilient ourselves. All of us have periods of time where we get things wrong. And then if you're going to pass us our style of investing in a world where the market has such volatility, even on good companies like call yours, you have to live with the fact that sometimes your performance isn't going to be good.

01:20:30Sometimes you've got to be resilient and you realize you're right. You've got to believe in it and sometimes you've got to realize you're wrong. All this is underlined obviously by a level of desire to be excellent in what you do but make your colleagues better. This is unique to durable and we're just different here. So when people think about being excellent at durable, they have to think about being excellent in what they do and they have to be excellent at making their colleagues better. It's got to be both. We're an and culture.

01:21:01Then obviously we talked about why what we do is different. our ability to invest in dualingo as a private company and still own it today, our ability to invest in Figma when it's a $30 million company and the same person evolves a day, we have to have people who are both good at analyzing private companies that are early stage growth companies and then understand scale durable growth companies and understand the subtleties and the nuances of private markets and the relationships and the way governance work, but also understand truly being a minority investor in the public markets. That second piece, which is you're expected to make your colleagues better. How does that actually work in practice? What do

01:21:39people literally do? Is it squishy, no, and you see it type stuff, or is it more structured than that? Look, I'll give you the measurement and then I'll give you how it really works. When we do 360 reviews at Durable, we actually ask everyone to give feedback on what their colleagues did to make them better. It's important. We're of really pleasant culture and we have high quality people, but it's not a nook helped me this year and she's a nice person. It's if you're following DoorDash, it's that Anook helped me understand DoorDash because of her knowledge about Agenda Commerce on Shopify really helped me. Or when we did an investment review, as an investment team, she took a special interest and she followed up with me or she went to a meeting that was

01:22:27important and gave me her perspective. We asked people to basically point to specific investments that they have. The second thing we do is I'm one of these people who believe we want to have great people. We have to attract great people. We have to allow great people to become great and provide the environment. But I also believe we have to have the right amount of process that enables true excellence and creativity. We, I think from an hour's perspective, probably do less or the same amount.

01:23:02as other investment firms, but I think the impact is really high. I'll give you a simple example. We do the same investment meeting everyone else does on Mondays, but we do an additional meeting where we go through ideas that we're looking at and we gate them together. We're going to go spend more time on an investment. Everyone's in the room when we decide to go do it. So people start to learn what is it that's a good use of their time, what's not a good use of a time. And if it is, if we're going to go look at something and I got to go answer these couple questions in the next stage of investment due diligence,

01:23:34is there a colleague here who can help me do it? We get together on Fridays, and by the way, we do it in the office. We have lunches and investment team and we talk about insights. You don't prepare for this meeting, but this would be, hey, I had an interesting conversation with a CEO

01:23:49or maybe this week, I'm sure we'll talk about it. I listened to OpenAI Dev Day, and this is what I thought was interesting. or maybe I thought about this. Does anyone think about this? So we're trying to look for lateral insights to learn for each other. And then for sure,

01:24:04we do investment reviews where we do deep dive on stocks. Multiple people look at this. I learned this from, you had Kelly on the firm, Lone Pine, really. I learned that from Steve. I'm sure Lone Pines still does it. We do KPI's,

01:24:18the operating reviews, where we go through the whole portfolio and every colleague reports to everyone else, how they did. And we do that's not to, basically be a session while you're great or I got it wrong. It's more like, here's clinically what happened and everyone can learn from it, but also lend their lens because it's not great, bad. A lot of times it's subtle. This thing was good. This thing was mixed. People couldn't have

01:24:41their lens. And then we get together twice a year and we have off-sites. You can probably tell we have a lot of fun and durable, but our off-sites don't look like other people's off-sights. We used to do team-building activities. Now you do KPI reviews. And now we don't do them. Why don't we do them? Because actually, we're a group of people who likes learning from each other and like sharing insights. And the activity we're going to get together for three days is going to be we're going to basically do look backs. We're going to look at reviews. We're going to go study an industry. We're going to go talk to a CEO. And then we're going to all learn from something such that we can all make each other better. It must be very powerful when you're making an initial projection on a KPI or something.

01:25:24something to know that in the six months and year and two years and three years hence, it's going to be looked back upon. You're probably sharpen your pencil a little bit. You do, but I think what's special about our culture, and I always tell this to people before they join, and we tend to hire young people and develop them, but if you've been anywhere else, you don't believe us. People think when we get together and we do KPIs or do three-year lookbacks, or we'll do a session sometimes where we'll look at reinitiations in the portfolio, things we sold before and then we bought back. And a lot of times, if we did that,

01:25:56why did we sell it in the first place? Maybe we got it wrong. We don't do any of this in the spirit of, you made a mistake. This is an environment where you should critique yourself negatively. It's like, no, we should be intellectually honest, just like we want our executives to be. We want to be clinical in what we did.

01:26:13But then we want to do in the spirit to try to learn from it and get better or put our data out there so we can learn from our colleagues who might have a valuable perspective to make us better. And if we can take the attitude of intellectual, honest, self-improvement, humility,

01:26:33that that makes us better. When you were doing your tour to learn about the franchises that were better at the end of the founders run and those that didn't make it, what did you learn? I won't mention the names of those who didn't make it. Because the thing about not making it

01:26:49is a little bit like are investment memos when we invest in great people who are trying to build companies. A lot of them do great things and they just don't make it. In success, there's a lot of good fortune. I think what I learned was if you don't architect the system on day one for success, then you end up with a lot of conflicts that sometimes undermine what you could have accomplished. We try really, really hard to durable not to make compromises. If we go hire someone on the investment team, we want to go hire someone who one day could be a senior partner or one day go basically manage the capital base.

01:27:30Or if we would ever launch a new product, go launch that product. We're looking for people who can be as good as I am or Nook is or Corey's or Catherine. We want great people. For sure, you usually start in our parlance as an associate. you're going to start supporting someone and you're truly going to be an apprentice in their way. And then even when you become an analyst

01:27:51the first three years, you're probably doing real analytical work, but probably you're early in your journey. But we don't want to hire you, we don't want to promote you unless we think you can actually one day lead the investment organization

01:28:06and drive the firm. And the reason I feel that's so important is we just don't have that many slots. It's just like the companies. If you don't believe you can get better, you don't do it. Right? That's hard. The other thing that's hard about it is when I went and looked at these firms, I do think there is a level of growth you have to pursue. Durable is a performance-driven organization. We break every tie in pursuit of investment excellence. We haven't really, you know, market ourselves or try to get new investments since 2022.

01:28:43too. Why is that? Well, I think we're performing really, really well, but I just believe markets are pretty full. And we're a long-only firm. We're not going to short. We're not going to really try to time markets. But if you're going to be our investor over time and we're going to do well by you, we should probably take more of your capital when on balance the entry point is lower than higher. We're going to break everything. We're going to really understand if we're going to do less what it means to be able on the public side, to be able to own meaningful positions and companies to really be able to trade

01:29:18if there's quarterly volatility such that we can buy more when things are attractive. Everything that if we're only going to do maybe five, I think since 2023 we've done 14 new private investments, so we back to doing five a year. If we're only going to go do five

01:29:34and we're going to start relatively small, a lot of times we start by investing $10 or $20 million, it's going to make an impact for our investors, right? We've got to be a performance-driven organization. And for our entrepreneurs, we got to be able to do exactly what we've done for Luis. We have to be able to do for Dylan. And what I think we're doing for Dylan, we have to be able to support Canva and bending

01:29:57spoons and the next generation of those. So we got to go do that. With that said, I do believe that these investment firms that have persisted, actually have done a good job of at some point in time, while the initial team was at its high performance and so had plenty of runway, started to prove that other people could participate in the investing process. That's something that we started to do internally with how we approach the private markets. We got to over time flush that out. What is your pitch to all the great and emerging private companies out there that they should soon or eventually be publicly traded?

01:30:37This is controversial. This is why I love what we do. Because first of all, the world keeps on adapting. And when I first started investing in private companies, it was highly controversial that any late stage private company would be valued at above a billion dollars. We talked about Workday earlier. When we led the investment round at Work Day at $2 billion, everyone thought we were crazy. We invested in Twitter at a billion dollars. I was severely publicly critiqued. Now people look back at that and it's just like, wow, the idea that you would have a billion dollar private company, that's not even newsworthy anymore. What has changed, obviously, in the private markets is that you can be a growth company that loses money and that continues

01:31:23or be marginally profitable and not only be valued at a billion dollars, you can be valued at $100 billion. And there's even a view, and I think it's thought, I'm not criticizing it. There's even a view that you can be an indefinite private company. SpaceX or something. Like SpaceX. Maybe Elon is correct and SpaceX never has to go public. That's really only happened in the last five years. Some people correctly pointed out, this might be an incredible path for certain companies. And by the way, I think there's some truth in it. In the ideal situation, you're not beholden to short cycle performance. So you can basically drive growth, innovation, and at the right point in time, profitability, and discipline

01:32:09in your business, but you can do it on a time frame that lines up with your individual business or your own competitive reality and not have to deal with the public markets. I get it. I actually think it's very thoughtful. Here's the good news about life. We're going to actually run an experiment. We're going to actually know the answer. I'm not saying that's wrong. is what I think. First of, I don't think it's for everyone, but I believe the path to building a compounder or even what some people would say, a generational company through the public markets is proven. If you understand how to do it, actually very clear what you do. Let's go back to the compounder studies, and then I'll give you an example for two. When you look at these compounders

01:32:56that were six-x companies in 10 years, the 40 of them, the average one of them has a period of time where the stock goes down 50%. And it doesn't go down 50%, only when the market is down 20. They go down 50% when they go through transition. So I'll give you an example for my career. Netflix started as a DVD mail business. To Reed's credit,

01:33:22he realized that streaming was the future, and he wanted to tackle this offensively. Like any transition, it's a little messy. First of all, he tried to split the company. He announced that he was going to have Netflix and Flickster. He had to go back because he violated customer trust and churn spiked. And then the other thing that happened was in that period of time, it was buying back stock at $280 and the stock went to $70.

01:33:51And, you know, I remember this really well. When I was at Tiro, I led a pipe to recapitalize Netflix. And Reeves a great entrepreneur for a lot of reasons. and I remember calling him on a Saturday saying, hey, Reed, look, I could be reading this wrong, but there is a scenario here where the market's right and you have to raise money. And he said, Henry, what are you even talking about? And I said, Reed, I'm a huge admirer of what you're doing. I believe in what you're doing.

01:34:17I believe it's offensive. But I also believe it's a tough financial transition. You've got to go from a variable cost business model where the studios rent you DVDs on a usage basis to a fixed cost business model where you've got to write big checks to people like Discovery and Disney to acquire content plus the stuff. He hadn't launched any original,

01:34:37but you're investing in original programming. And if you run this scenario that I'm doing on the potential subscriber losses in this transition, you're going to run out of cash. Or at least the market's going to think you're going to run out cash and your stock is going to go down

01:34:51a lot more than $70. To reach credit, he said, I have not thought about this as much as I should. let's talk tomorrow, I'll get the CFO on the phone, you go through your scenario, we'll go through ours, and I can learn. At the end of the day, when he showed it our data,

01:35:06he's like, look, I don't agree with your scenario on subs, but yours is not out of the realm of reasonable thought process. And he ended up raising a pipe. We put, when I was at T-Roe in half of it, and I did that, and then TCV, J. Hogue, did the other half. This to me is the classic example. of a market-leading company embracing a transition, they obviously ended up winning.

01:35:33We did that pipe at $4.5 billion. Look at the market cap of Netflix today. Yeah, it was a little messy, but it worked out well. So what does the public market do? I think, first of all, it sent a signal to Netflix that actually you're under a real transition here. And maybe your assumptions on your financial model are you need to have a wider,

01:35:57fan of scenarios. Two, if you work at Netflix, you could say, well, you had the pain of seeing your stock out from $2.80 to $70. By the way, people think that was a great investment. I always point out to people a year later, it was in the 50s, right? So a year later, did it look like a great investment? Right. But I think what it does, you have to do this properly, you have to be a real deal, you have to have a culture, but it allowed Reed to basically align external and internal investments and actually get his entire senior team aligned on what they needed to do, but also realigned on incentives. So I point out to people, I believe to build a great company, you have to balance growth, profitability, and innovation. I talked earlier about if you're a growth

01:36:41company, you don't have to trade on a P.E., but you have to show that path back to the conversation with Doolingo and Toast and a firm in that transition. And you're better off doing it sooner rather than later. and two, if you've got to go realign your internal team, well, actually realigning people to the right mark, it's actually really helpful. And the people who want to re-up, re-up, and the people who do it get handsomely rewarded, and the people who don't obviously can move on. And I think that's really, really good culturally. Could I correctly boil this down to the positive value of daily marks and the depth of of public markets and their investors, that those two things in combination,

01:37:26or the reason why being public might be valuable relative to the private alternative? I think I probably, because I used the Netflix example when they were fully formed and they were a discipline company, I also think that putting discipline into a company when your corporate culture has already formed,

01:37:44I don't wanna use the word stasis, but at a certain scale, it's hard to change. It's not good. To run a company, well, you have to be in the and business, not the or business. You have to drive growth measured by market share in the short term. You have to drive innovation or allocate capital well to position you sell better for the future. And you have to basically drive profitability. Partially profitability allows you to invest, but profitability actually forces you to drive efficiency and discipline through the

01:38:18organization and make sharp decisions on capital. And what I always tell people about this, is you should think about your CFO's function, not as a policeman, but actually as someone who basically sells standards that forces you to make sharp decisions. I think people realize this more today than they did a couple years ago. A lot of times when you prioritize and you focus on what really matters, agility comes in and comes in and you accomplish more. And when you try to do too much, essentially investment has no cost. A lot of times it's lazy. and it's not sharp. I feel like we've covered so much ground. I'm curious if there's any other ingredient in durable story or your story that we haven't covered that you feel like is

01:39:03essential to understanding you and what you're doing and why you're doing it. I think we want to have fun and we actually root for everyone. The reason I say this is I'm a huge sports fan. I love studying sports. To me, there's two types of competitive greatness and they both work. There's Michael Jordan, who was such a fierce competitor, that essentially if you didn't rise to his level, he drove you out of there. And it works. And those bulls showed up with a chip on their shoulder every game. And it was amazing. And they were great. And then there are the people who play basketball and they say, this game is great. We want to have fun. We want to have fun. and we want to elevate the game and we want to win.

01:39:56And the people who compete with us, we think they're great and we're rooting for them. Now, of course, if we're going to play against them, we're going to be competitive on that day and we're going to win, but we want to actually have fun. We believe everyone can win. And I think that's durable. That's really important to me.

01:40:17When we invest in people, that's the kind of person we want to invest in. when we do, we're public market investors at our core. If we have to, and we did, we, because we think it's right for our clients, have to go sell a firm, which we did, because we believe from a risk-reward standpoint, we have to go do it. We're going to go do it. I always say it's not our money. It's our investors' money. We've got to be fiduciaries first. But when we did that, we want to see Max win, and we never stopped talking to Max. In fact, I think he would tell you some of the things in our relationship where he learned from me more than I learned from him was in the period of time where we didn't own his stock.

01:40:55Because we don't think about it as a stock. We think about it as we want to see Max win. And even the investors, I don't think about us competing against investors. I mean, there's so many investors who I respect. And honestly, if they're doing their craft well and they're high quality people, we want to see them win.

01:41:13That is so core to the way we deal with people and the way we hold our jobs. ourselves accountable. Is that the Steph Curry wizards at their peak approach to contrast against the Jordan approach or something like this? Yeah, that's exactly how I think about the Warriors. Steve Kerr, I think's amazing. John Wooden, amazing. I think John Wooden is the greatest coach of all time. They think of what John Wooden wanted from his players. He wanted them to be great people. He didn't necessarily believe they all had the same modes. I mean, Kareem Abdul-Jabbar and Bill Walton, maybe the two greatest college basketball players of all time in their eras, but definitely in the top five, totally different people.

01:41:54And he accepted that, but he wanted them to be great, not only as basketball players, but as people. He was measuring UCLA against that. And frankly, of course, the output of that is the success they had. And to me, that was the Lakers with Magic Johnson. You watch those guys play basketball, and they just were having fun. And they were elevating the game. I remember going and seeing the Warriors. When Steph and Draymond and Clay were just coming up, the energy of those people was amazing. And they transformed the game, right?

01:42:36They changed the three-point shot. And then, of course, when you see greatness like that, you've got to go learn from it. And of course, I've gone and understand the way Steve Kerr is and how he cares about competitiveness, but he cares about mindfulness. He cares about fun. If you're going to be a new warrior, he's going to go visit you in your hometown to truly understand who you are as a person. I mean, that to me is great.

01:43:03And that to me is part of what being durable is. It's a wonderful excuse to ask you my traditional closing question. What is the kindest thing that anyone's doing? ever done for you. I prepared for this one, Patrick, because I do listen to your show. So I have to say it's my mom. My parents got divorced when I was young and my mom raised me. I learned so much from her. The thing my mom did for me that when hindsight was so wise and proved to be so kind was I took a leave of absence from Harvard to go work on a campaign for state representative running for U.S. House of Representatives.

01:43:41and she was totally supportive of that. And then he was expected to lose. And in a long story, I became his campaign manager, he ended up winning. You were 19? Yeah, I was 19. And I came to her and I said, Mom, I want to go to Washington, D.C.

01:43:57and be chief of staff for Congressman Doidge. And she said, wow, you really want to do that? And I said, yes. I said, in order to do that, I can't take another leave of absence from Harvard. They don't let you do that. I have to drop out. She was not on the Bill Gates

01:44:14or I guess future Zuckerberg belief in the world. It was not her ethos. But she was really accepting. She was very thoughtful and listened to me. And she said, Henry, if that's what you really want to do, it sounds like very thoughtful. It's a very adult decision. And if you're going to go do that,

01:44:30I'm always here for you. I love you. I'll always be your mother. You come to me with anything. But what it practically means is you need to be responsible for paying for your education. Because you say you want to go back there, I'm going to take your word, but you've got to go do this now as an adult,

01:44:48because you're making a real adult decision. And I tell this story to my two sons, because I think it was very important but also kind, because it taught me that if you're going to go make major decisions, you have to be thoughtful about them. people will support you, but you have to be able to be responsible for the consequences. An amazing, beautiful story, different flavor than lots of these answers that I got. I love it. Henry, thank you so much for your time.

01:45:17Thank you. If you enjoyed this episode, visit join colossus.com where you'll find every episode of this podcast complete with hand-edited transcripts. You can also subscribe to Colossus Review, our quarterly print, digital, and private audio publication featuring in-depth profiles of the founders, investors, and companies. that we admire most. Learn more at join colossus.com slash subscribe.