May 2, 2024 • 2hr 6min

Mitch Rales: The Art of Compounding - [Art of Investing, Forever Episode]

Invest Like the Best with Patrick O'Shaughnessy

This episode features an interview with Mitch Rails, co-founder of Danaher Corporation and one of the most successful business builders and investors of the past 40 years. Rails discusses his business philosophy, investment approach, and lessons learned from growing Danaher into a $200+ billion company that has compounded at over 21% annually for four decades. The conversation covers Rails' early influences, the evolution of Danaher, his current investment focus on backing founders for 20-30 year time horizons, philanthropy efforts like Glenstone Museum, and his recent acquisition of the NFL's Washington Commanders. Throughout, Rails emphasizes the importance of long-term thinking, continuous improvement, and developing talent.

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Key Takeaways

Long-term thinking and patience are critical for building great companies and generating exceptional returns. Mitch Rails emphasizes thinking in decades rather than quarters or years.
Continuous improvement and benchmarking are core principles that have driven Danaher's success over 40 years. The Danaher Business System evolved from studying and adopting best practices from companies like Toyota.
Finding passionate founders with learning agility and a 20-30 year time horizon is key for Rails' current investment approach. He looks for businesses that can generate 50-100x returns over that timeframe.
Recurring revenue business models in secular growth industries like healthcare, software, and industrial efficiency are attractive long-term investment areas.
Providing operational expertise and strategic guidance to help companies scale is a key part of Rails' value-add as an investor beyond just capital.
Maintaining concentrated positions in high-conviction investments over decades, rather than diversifying, has been crucial to Rails' personal wealth creation through Danaher.
Philanthropy and stewardship are important principles, as evidenced by Rails' work with Glenstone Museum and the Washington Commanders NFL team.

Introduction

This episode features an interview with Mitch Rails, co-founder of Danaher Corporation and one of the most successful business builders and investors of the past 40 years. Rails discusses his business philosophy, investment approach, and lessons learned from growing Danaher into a $200+ billion company that has compounded at over 21% annually for four decades.

The conversation covers Rails' early influences, the evolution of Danaher, his current investment focus on backing founders for 20-30 year time horizons, philanthropy efforts like Glenstone Museum, and his recent acquisition of the NFL's Washington Commanders. Throughout, Rails emphasizes the importance of long-term thinking, continuous improvement, and developing talent.

Topics Discussed

Early Influences and Founding of Danaher (20:57)

Rails credits his father, who grew up in an orphanage and built a successful building products business, as a major influence
Learned "street smarts" and entrepreneurship from observing his father's business dealings
Started Danaher in 1984 with his brother Steve after acquiring several industrial manufacturing businesses
Initial goal was to build a $250 million business with 10% operating margins

Evolution of Danaher and Long-Term Thinking (41:57)

Rails outlines the major phases of Danaher's 40-year journey:

1.0 (1990-2000): Professionalizing the business under CEO George Sherman, growing market share in tools
2.0 (2001-2014): Expanding into new industrial markets and healthcare under Larry Culp
3.0 (2014-2020): Simplifying and focusing on life sciences/diagnostics under Tom Joyce
4.0 (2020-present): Deepening life sciences focus and incorporating early-stage investing under Rainer Blair

Rails emphasizes how each CEO transition aligned with the company's evolving needs and strategy. The ability to make these pivots while maintaining a consistent culture of continuous improvement has been key to Danaher's long-term success.

Danaher Business System and Continuous Improvement (15:16)

Danaher Business System evolved from studying Toyota and other manufacturing leaders in the 1980s
Focuses on continuous improvement in all aspects of the business, not just manufacturing
Current CEO still leads "kaizen" improvement events to reinforce the culture
"We have 2000 of our associates engaged in kaizens around the world this week. So that's called walking the talk and making sure that you're setting an example at the highest levels of an organization."

Current Investment Philosophy (1:17:03)

Rails outlines his approach to private investing:

Find passionate founders who can give a 20-30 year runway
Invest in businesses with potential for 50-100x returns over that timeframe
Focus on private companies to avoid short-term public market pressures
Provide operational expertise to help companies scale
Concentrate in high-conviction investments rather than diversifying

"If we can get a handful of these duration models of 20 to 30 years, it's all gonna take care of itself in the overall returns for the bigger picture. It just takes a couple to change the dynamic for great outcomes to happen."

Identifying Talent and Business Traits (1:02:49)

When evaluating founders and businesses to back, Rails looks for:

Learning agility and ability to pivot the business when needed
Passion to create something great over decades
Businesses with platforms to do something special long-term
Recurring revenue models
Opportunities to expand into adjacent markets/products

Secular Trends and Investment Areas (1:33:53)

Rails highlights several attractive long-term investment themes:

Healthcare efficiency and improving health outcomes
Digital transformation across industries
Vertical market software for specific industries
Industrial efficiency and automation

Philanthropy and Glenstone Museum (5:01)

Co-founded Glenstone Museum with his wife Emily in 2006
Aims to create a unique integration of art, architecture and nature
Applying business principles like continuous improvement to philanthropy
Taking a 30+ year view to build a world-class institution

Acquiring the Washington Commanders (1:48:46)

Rails discusses his recent acquisition of the NFL's Washington Commanders:

Views it as a stewardship to rehabilitate a storied franchise
Focusing on talent acquisition, starting with new GM and head coach
Aiming to rebuild fan engagement after years of decline
Applying business principles like benchmarking other stadiums

"We have to look at this as like we're building a house brick by brick, layer by layer, until the house gets built the right way and can sustain itself. We can't guarantee Super Bowls, but what we want to guarantee is that we're perennial playoff contenders."

Lessons on Leadership and Building Great Companies (1:30:55)

Importance of finding leaders with learning agility who can pivot the business
Providing air cover for CEOs to think long-term amid short-term pressures
Value of benchmarking and learning from others' mistakes
Cultivating a culture of continuous improvement at all levels

Conclusion

Mitch Rails' 40-year journey building Danaher into one of the world's most successful companies offers a masterclass in long-term thinking, continuous improvement, and value creation. His current focus on backing founders for 20-30 year time horizons and providing operational expertise beyond just capital represents an innovative approach to private investing.

The core principles that drove Danaher's success - benchmarking, talent development, strategic pivots, and relentless improvement - are evident in Rails' approach to new ventures like Glenstone Museum and the Washington Commanders. His emphasis on stewardship, philanthropy, and building institutions that outlast any individual speaks to a broader philosophy of using business as a force for positive impact.

For investors and business leaders, Rails offers a compelling model of patience, concentrated bets on high-conviction ideas, and the power of compounding returns over decades rather than quarters. His continued curiosity and learning agility even after decades of success is an inspiration and blueprint for sustained excellence.