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Finding The 1% of Stocks That Matter

1h 53m Invest Like the Best Jan 2026

Key Takeaways

  • Only 1% of stocks are "valedictorians" — Over any rolling 10-year period, about 40 stocks out of 4,000 compound wealth at 20%+ annually (6x returns). That's about 1%. And 80% of them start as small caps.
  • The Walmart lesson — T. Rowe Price's New Horizons fund was driven by just 20 stocks over 50 years. Had they not sold Walmart (bought at 50 stores), that one position would be worth more than the entire $8B fund Henry later managed.
  • Act 2 entrepreneurs have an edge — If you've built a great company before, you have higher odds of doing it again. Workday founders (from PeopleSoft), Max Levchin (PayPal to Affirm), Luis von Ahn (reCAPTCHA to Duolingo).
  • Dollar-cost average UP, not down — For early-stage growth companies, the investment memo must say "if this works, we want to buy more at higher prices." If you can't write that memo, don't make the investment.
  • AI is Kaizen for white-collar work — China gave us 40 years of cost optimization for physical products. AI is the beginning of the same journey for human processes. Companies that leverage AI for cost advantage and reinvest in moats will dominate.
  • 80-90% of institutional flow is short-cycle — Most money is measured monthly or quarterly. Last earnings season was more volatile than the financial crisis, despite fundamentals being fine. This creates opportunity for long-term investors.
  • The "and" business, not the "or" business — Great companies drive growth (market share), innovation (capital allocation for the future), AND profitability. All three. Not trading off one for another.

The Math That Changes Everything

Henry Ellenbogen discovered something that reshaped his entire investment philosophy: studying the 50-year history of T. Rowe Price's New Horizons fund, he found that just 20 stocks drove essentially all the performance.

Then came the Walmart story. At the fund's 50th birthday party, a former manager told the story of meeting Sam Walton on the IPO roadshow. Walmart came public with just 50 stores. The fund bought it. Then sold it.

"Had the stake in Walmart not been sold, the stake in Walmart would have been greater than the sum total of everything that I was managing—$8 billion. One bad decision, or maybe you had to make that decision every day because markets are open every day, actually wiped out all these other good decisions mathematically."
— Henry Ellenbogen

This led Ellenbogen to ask a simple question nobody had systematically studied: in the history of US equity markets, how many stocks truly compound? The answer: about 40 stocks out of 4,000 over any rolling 10-year period. About 1%. The valedictorians. And 80% of them start as small caps.

The Act 2 Advantage

One of Ellenbogen's strongest signals: entrepreneurs who have already built something great have higher odds of doing it again. He almost named his firm "Act 2 Capital" because this pattern was so central to his philosophy.

Examples from his portfolio: Workday's founders (Aneel Bhusri and Dave Duffield) built PeopleSoft first. They understood HR systems of record, edge cases at scale, and enterprise go-to-market—then applied it to cloud. Max Levchin co-founded PayPal, then built Affirm. Luis von Ahn created reCAPTCHA and sold it to Google, then built Duolingo.

"The last time I spent time with someone that technologically strong who also has that much business clarity and can make complex topics simple was Toby from Shopify when they were private. We cleared our schedule—whenever Luis would spend time with us, we'd go to Pittsburgh."
— Henry Ellenbogen on Luis von Ahn

Act 2 entrepreneurs get to start with a clean sheet of paper: they can align people, organizational structure, and investors exactly how they want from day one.

Dollar-Cost Averaging UP

Durable Capital's investment memos are written differently. For early-stage growth companies, the memo must answer: "If this company does what we think over three years, would we want to buy more at higher prices?"

If the answer is no, they can't make the investment. Their thesis can never be "it gets bought." This forces discipline: you're not buying a position, you're starting a relationship with a potential compounder.

For already-advantaged companies in temporary distress (like Colliers when commercial real estate fears peaked), the opposite applies—dollar-cost average down.

AI Is Kaizen for White-Collar Work

Ellenbogen frames AI through a 40-year lens. Every product business eventually had to understand their "China cost"—the global supply chain's ability to make physical goods substantially cheaper. Those who didn't adapt went out of business.

"We've been able to really lean out product-based businesses and working capital for 40 years because of China. But in many ways I feel like we're just getting started on processes that are done by humans."
— Henry Ellenbogen

AI is the same inflection point for human work. The pattern Ellenbogen learned from Amazon: the best businesses use technology to lower costs and drive revenue, gain 30%+ incremental market share, then reinvest that unit economic advantage into something persistent—a moat that competitors can't catch even if they copy the strategy with equally talented people.

Amazon did this by reinvesting cost advantages into physical fulfillment infrastructure. Today's AI winners will do the same—using productivity gains to build advantages that compound.

Why Markets Are So Volatile (And What To Do About It)

Ellenbogen estimates 80-90% of institutional flow is now driven by firms with one-month or three-month agency cycles, plus quants reacting to price signals. Last earnings season was more volatile than any since the financial crisis—even though fundamentals were fine.

The implication: your time horizon can't be longer than your career horizon if you work at a firm that cuts your capital after a bad quarter. This creates structural opportunity for investors willing to accept short-term volatility.

Durable's response: do less to do more. If they're going to accept volatility, they need to deeply understand the business and the people—well enough to buy more when macro fears create opportunities.

The Domino's Pizza Pattern

One of Ellenbogen's key insights: the best small-cap stock of the 2010s wasn't a tech company. It was Domino's Pizza—a modest-growth business that averaged less than 10% annual growth.

What made Domino's special? In a market split between local pizza places (great product), national chains, and regional players with geographic scale but mediocre pizza—Domino's realized that if they invested heavily in technology for convenience (their app, direct customer relationships), they could win the entire middle third of the market.

This is the "good to great" thesis: existing businesses with physical distribution or scale advantages that are late to leverage technology often become the best investments. The technology advantage transitions into a physical moat. Walmart and Costco did this to compete with Amazon—and all three ended up winning.

Running the "And" Business

What separates compounders from everyone else?

"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 yourself better for the future. And you have to drive profitability."
— Henry Ellenbogen

Most companies think they need to trade off between these three. The compounders figure out how to do all three simultaneously. That's what creates durability.

What if you had invested in Walmart at IPO?

The one that got away from New Horizons fund.

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