Clay Fink (18:05)

Let's take a quick break and hear from today's sponsors.

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Clay Fink (19:48)

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Clay Fink (22:12)

alright, back to the show.

Clay Fink (22:14)

Perhaps some fund managers can't handle the intense drawdowns and are facing pressure from shareholders, so they're either trimming or reducing their stakes in these names or regardless if their long term outlook on these businesses has changed significantly or not. I plan to hold these names and see how things shake out, but I'll be touching more on this at the end of the episode. The software sell off was also a stark reminder for me of just how volatile stocks can be and how the market has a way of testing each of us eventually. It's one thing to watch a sell off on the sidelines, and it's a whole nother thing to actually experience it for yourself with your own money on the line. Since the market can oftentimes swing like a pendulum, great companies that swing too far on the upside and become overvalued can just as easily swing back the other direction and become undervalued for a variety of reasons. As Kahneman discussed, we live in a probabilistic world. Anyone who tells you that an investment will play out a certain way with 100% certainty is lying to you. Jumping back to the System 1 System 2 thinking When System 1 uses substitution to simplify the problem, System 2 thinking can choose to either accept or reject this initial gut reaction. However, a lazy system 2 often follows the path of least resistance. Furthermore, you may not even realize that the original question or problem was difficult because the intuitive answer just came right to your mind. One of the most important ways substitution shows up in investing is is when we replace a hard analytical question with a much easier emotional one. So instead of asking what is the intrinsic value of this business and what are the probabilities attached to the different outcomes, we can ask something much more simple. So you can ask yourself things like Do I like this company? Does this stock feel cheap after falling 50%? These substitute questions are easier for our system one to answer, but they can quietly lead us away from rational decision making. Because liking a company or seeing a lower stock price tells very little about the future returns. Another common form of substitution happens when investors confuse stories with probabilities. So rather than asking what is the statistical likelihood that this company will succeed relative to similar businesses in the past, we ask, is this a compelling narrative? If the story is exciting, for example, the company's riding the AI wave or they're addressing a massive tam, then our System one can supply a confident answer even when the base rates are unfavorable. This is how investors end up overpaying for growth or assuming success is inevitable simply because the story feels convincing. Substitution can also play a role during market drawdowns. So when prices fall sharply, the difficult question is whether the long term cash flow prospects of the business have materially changed. But instead, we often answer an easier question. How uncomfortable does this loss feel right now? That emotional discomfort can be mistaken for new information causing investors to sell not because the investment thesis is broken, but because the pain of seeing red numbers has become too intense. And trust me, when it comes to drawdowns in my own portfolio, I feel that discomfort just like everybody else. Having an understanding around your thesis, around a company. For me, it doesn't make the drawdowns any less painful in most cases. I thought that chapter 19 in the book titled the Illusion of Understanding it was quite relevant for investors. So in Nassim Taleb's book the Black Swan, he gets into the idea of the narrative fallacy. This describes how flawed stories of the past shape our views of the world and our expectations of the future. Narrative fallacies inevitably rise from this continuous attempt to make sense of the world. The stories that people tend to find compelling are simple. They're concrete rather than abstract. They assign a larger role to talent than to luck, and they focus more on the few striking events that happened rather than on the countless events that failed to happen. Taleb suggests that we humans are constantly fooling ourselves by constructing flimsy accounts of the past and believing that they're true. People love a good story that helps them make sense of the world. So to help illustrate how stories can give people a false sense of the world, Kahneman discusses the story of Google as of the time of writing Google Now Alphabet is one of the world's most successful companies. In September of 1998, two Stanford graduate students in the computer science department came up with a superior way of searching information on the Internet. They obtained funding and made a series of decisions that worked out very well. Within just a few years, the company was one of the most valuable stocks in America. On one memorable occasion, they were lucky, which makes the story even more compelling. A year after founding Google, they were willing to sell their company for less than $1 million. But the buyer said that the price was too higher, so the transaction, of course, never happened. This single lucky incident. It helps showcase the multitude of ways in which luck affected where Google is today. The story of Google mostly focuses on the founders and all of the fantastic decisions they made. And it largely ignores the companies that ended up falling by the wayside. The story of Google might tell you some things about how Google succeeded, but it doesn't necessarily tell you anything about how businesses in general succeed, because Google's competitors may have taken a very similar business approach but had a couple of unlucky breaks that just didn't fall in their favor. What these stories tend to leave out are base rates. How many other companies pursued a similar strategy, had comparable talent, and still failed? This leads us to dramatically overestimate the odds of success. Kahneman writes here, the human mind does not deal well with non events. The fact that many of the important events that did occur involve choices further tempts you to exaggerate the role of skill and underestimate the part that luck played in the outcome. Because every critical decision turned out well, the record suggests almost flawless execution. But bad luck could have disrupted any one of these successful steps, and the halo effect adds the final touches, lending an aura of invincibility to the heroes of the story. The main takeaway from this point is that luck is likely understated in the story of any company, and the more luck is involved in an outcome, the less there really is to learn from the decisions the business people made in making that company a success. So since our minds cling to making sense of the world and crafting narratives and stories around it, the past tends to have played out in a way that makes sense to us. But at the same time, we might not be so sure of how the future will unfold at the same time. And then as the future continues to unfold, our view of the world is continually changing and we tend to be a little bit forgetful of how we used to view things, especially when it comes to the large, unexpected events. So think about the COVID pandemic, for example. So before and after the pandemic, I'm sure that most people's views of the world changed pretty drastically, but we tend to be rather forgetful of what we used to believe prior to that big event. And this can lead us to underestimate the amount of surprise that we felt from those types of events. Again, this is something I can see in myself as well. A stock goes up and I'm thinking, of course the stock was going to do well. Why didn't I buy more initially? Or when a stock goes down, I think of course I overpaid for the business or XYZ competitor was going to steal market share. Why did I ever buy that? This is also known as hindsight bias. Everything appears obvious with the benefit of hindsight. Hindsight bias can also lead stock investors to make poor decisions because they fall prey to resulting they might assess the quality of their decisions not by whether the process was sound, but by whether its outcome was good or bad. For example, consider a low risk surgical intervention in which an unpredictable accident occurs that causes the patient's death. The jury would then be prone to believe, with the benefit of hindsight, that the operation was actually risky and the doctor who ordered it should have known better. This hindsight or resulting bias makes it almost impossible to evaluate a decision properly. This is also a challenge for asset managers. One asset manager might make several good decisions that end up turning out poorly. This could then lead to investor outflows. And correspondingly, you might have another asset manager that made several poor decisions that happened to turn out well for them and experienced significant inflows despite their average decision not being as good. These snap decisions or conclusions come from System 1 thinking. By System 1's logic, the world is more tidy, simple, predictable and coherent than it really is. And these illusions are comforting. They tell us that we can predict and control the future. Kahneman also has a discussion around the engine of capitalism. Many investors, myself included, have a bias toward optimism. Many of us view the world as more kind than it really is, believe our skills are better than they truly are and the goals we set as more achievable than they're likely to be. We also tend to exaggerate our ability to forecast the future. Kahneman writes, in terms of its consequences for decisions, the optimistic bias may well be the most significant of the cognitive biases, because optimistic bias can be both a blessing and a risk. You should be both happy and wary if you are temperamentally optimistic, end quote. So he explains that an optimistic attitude is largely inherited, and it's part of a general disposition for well being, which may also include a preference for seeing the bright side of everything. Optimists tend to be happier, have more positive attitudes, they're more resilient in adapting to failures and hardships, their chances of clinical depression are reduced, their immune systems are stronger, they take better care of their health, and they're likely to live longer. They're also more prone to investing in individual stocks. Optimists also play a disproportionate role in shaping our lives. Optimists are the inventors, entrepreneurs, and are political or military leaders, so not your average person. They seek challenges and take risks, and with success, their self confidence and optimism is reinforced through the admiration of others. But the blessings of optimism are offered only to individuals who are only mildly biased and don't lose sight of reality. The downside of optimism is that it can lead individuals and institutions to to take significant risk. Overestimating the Odds of Success because they misread the risks, optimistic entrepreneurs often believe they are prudent even when they're not tying this more closely to the engine of capitalism. The chances that a small business will survive for five years in the US are about 35%, according to the book. But it looks like the more accurate data today might be closer to 50%. But as you can imagine, entrepreneurs overestimate their ability to to overcome these odds, as most entrepreneurs put their odds of success at 70% or higher, and one third of entrepreneurs shared that their chances of failing were zero. These statistics shouldn't be surprising, as entrepreneurs tend to be optimists and who would start a business if they expected it to fail within the next five years? That in itself would be setting yourself up for failure. Kahneman tells a story of him and his wife. They went on a vacation to Vancouver island and they stayed at this attractive but deserted motel on a little traveled road in the middle of a forest. The owners were a charming young couple who needed little prompting to tell their story of how they came around to owning this motel. They had been schoolteachers in the providence of Alberta and they decided to change their life by using their life savings to buy this motel, which was built just 12 years earlier. Not realizing the irony at hand, the couple told Kahneman that they were able to buy the motel for cheap because six or seven previous owners had failed in making it a success, and they planned to take on a loan to make the establishment more attractive by building a restaurant next to it. They felt no need to explain why they expected to succeed while six or seven others had failed. Kahneman writes. A common thread of boldness and optimism links business people from motel owners to superstar CEOs, end quote for public company CEOs, a prime example is the leaders of large companies who sometimes make these big splashy acquisitions acting on the mistaken belief that they can manage the assets of another company better than the current owners do. This overconfidence leads them to potentially overpaying and overestimating potential synergies. The other thing about optimism and overconfidence is that this is the type of leadership that employees want to rally behind. For a number of years, professors at Duke University conducted a survey where they asked CFOs of large corporations what the return of the S&P 500 will be over the next year. Their findings clearly showed that these CFOs didn't have any clue about the short term future of the stock market as the correlation between their estimates and the true value was negative. When they said the market would go down, it tended to go up and vice versa. This shouldn't be a surprise either for our listeners, as Buffett has shared that stock market forecasting is a fool's errand. But these CFOs did not appear to realize that their forecasts were worthless. CFOs were also asked to give a high forecast and a low forecast with 80% certainty that the index's ending value would be within that range. So it's essentially saying without the big surprises, what range will the S&P 500 be in? Based on historical data, the correct range is about minus 10% returns on the low end and plus 30% returns on the high end. This confidence interval was four times wider than the intervals that were shared in the study, further showcasing the CFO's overconfidence. But what shareholder base or boardroom wants to hear from the truthful manager who speaks in those terms? The wide confidence interval may seem like a confession of ignorance, which is not socially acceptable for someone who is paid to be knowledgeable in financial matters. And even if they knew how little they know, they could be penalized for admitting it. The effects of high optimism on decision making are likely a mixed blessing. The main benefits include its contributions to good execution and resilience when facing setbacks. You could also argue that optimism is essential in business because setbacks are inevitable and someone who keeps going forward anyways will be able to push through until the next success comes their way. One way to combat this optimism and overconfidence when it comes to selecting investments is by performing a pre mortem. A pre mortem is an exercise where you imagine that an investment ends up going terribly wrong in the future, and then from there work backward to identify all the plausible reasons why it went wrong. This exercise forces System 2 to engage by identifying potential risks and blind spots, and it helps bring base rates into the equation which optimism would otherwise suppress. Pre mortems can force us to look at what could go wrong when the outcome is ultimately uncertain and help prevent us from making those costly investment mistakes. As many of our listeners know, Kahneman and Tversky they popularized the idea of loss aversion. Their research from 1979 found that losses hurt roughly twice as much as equivalent gains feel good. So, for example, losing $10,000 in the market hurts far more than the joy we feel from gaining $10,000. This asymmetry and emotional impact explains why drawdowns can just feel so overwhelming even when we know that drawdowns are expected. It also helps explain why investors often make emotional decisions at exactly the wrong time. In some sense, loss aversion is logical. A relatively large loss makes us more sensitive to similar and subsequent losses because a subsequent loss would consume an even greater proportion of our net worth. But loss aversion is illogical if it leads us to making a bad bet. The danger for investors is when avoiding the emotional pain of losses takes priority over making decisions based on probabilities and expected returns. When that happens, loss aversion stops protecting capital and starts actively destroying long term performance. For example, let's say you can reasonably expect a portfolio of stocks to generate roughly an 8% return over the next 20 years. Then it would be illogical to have a majority of your portfolio in bonds over that same time period if they yield only 4%.

Clay Fink (39:44)

Let's take a quick break and hear from today's sponsors.

Clay Fink (39:47)

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Clay Fink (43:07)

all right, back to the show.

Clay Fink (43:09)

Kahneman also framed loss aversion in another way that I hadn't really thought about before, but I thought it was really interesting. So he frames two different scenarios here. So in the first scenario, take a second to think about which of the two options you would prefer here. So you have option A, you would get $900 for sure, or option B, you get $1,000 with 90% probability. If you're like most people, you would probably just take option a, take the $900 because it's a sure thing and you don't want to risk potentially getting nothing. And then Kahneman flips this example on its head. Now in this next example, for option A, let's assume that you would lose $900 for sure. And then for option B you would lose $1,000 with 90% certainty. Which would you choose out of these two options? Most people in this scenario wouldn't choose option A Like they would in the previous example, they would actually select option B, meaning that they were likely to lose more money in that scenario, but have a slim chance of getting out without losing anything. To summarize the findings from this hypothetical scenario, humans tend to be risk averse when sitting on gains, but risk seeking when facing losses. Now this actually has profound implications when it comes to stock investing. Because if you invest in individual stocks, you're inevitably going to find yourself holding a stock that is down substantially. Consider that you purchase a stock for 100 and as you're holding it, the company starts performing poorly as the economy is entering a recession, so the stock price dropped to $40. Because of loss aversion. Many investors can be prone to just hang onto the stock even if they believe it is likely to drop down to an even lower price. So theoretically, if you signed a 90% probability that the stock would drop from $40 down to 30 due to, you know, the poor economy, then you may be better off selling the stock at 40 and reinvesting it into a stronger company. But because we're risk seeking when faced with a loss, we'd be prone to hold onto that stock even with the slim chance that it's going to bounce back to $100 a share. However, if a stock has fallen and you believe that the overall business fundamentals remain intact or potentially have even improved, then if that's the case, it may be justified to continue holding onto it or maybe even consider adding to it. When the fundamentals are strong and probabilities are in your favor. Selling simply to relieve the discomfort of a loss can be just as damaging as holding on blindly. Now, I mentioned that humans tend to be risk averse when sitting on gains, but risk seeking when facing losses. If we flip this scenario and look at what people do when a stock is up, we often see the opposite mistake. So imagine you bought a stock at 100. It quickly rises to 160. As the business executes well and the fundamentals remain strong, many investors feel the urge to sell early to lock in gains. Even if they believe there's a high probability the stock could continue compounding for the next several years. Because gains can feel fragile, investors become overly risk averse and prioritize the certainty of profits over the larger expected value of staying investing. I can't count the number of times I've had a listener of the show tell me that they had one of today's great companies many years ago and they thought they were smart by locking in a 40%, 50% profit. In the first year of owning it. Before we get into the next topic here, I wanted to share a little thought experiment with you. Take a few seconds to consider the following. Was Gandhi more or less than 144 years old when he died? So I'll give you a moment to think about that question, and once you have an answer here, I'll ask the second question. How old was Gandhi when he died? So you probably would guess that Gandhi was less than the age of 144. And even if we don't consciously do this, the number in the first question likely influenced the number we would choose for the second question. So the right answer was 78. By the way, you probably didn't believe for a moment that he lived for 144 years, but your associative machinery surely generated an impression of a very ancient person. Kahneman believes that the system, one part of our brain tries its best to construct a world in which the anchor matches reality. And this is something that likely happens totally subconsciously. So he conducted a study where there were two groups of people who had to answer questions. And similar to the one I just asked about Gandhi, another example was guessing the height of the tallest redwood tree in the world. So study participants who were asked if the height of the tallest redwood was more or less than 1200ft, they had answers that were significantly different than those who weren't asked that question that anchored them. So for the participants who were anchored to the 1200ft, their average response was 840ft, whereas the group that wasn't anchored had an average response of just 280ft, which is a significant difference. Similar experiments have been done with real estate agents, who are significantly influenced by the asking price of a home when determining the home's fair market value. Of course, this explains the concept of anchoring, which is the tendency for a given number to impact people's perception of an unknown value. I think one of the best examples of anchoring is how we tend to look at the stock price prior to determining the intrinsic value of a company. We know that we should calculate the value of a company without considering what the market believes the company is worth. But the stock price will almost inevitably influence our estimation of the stock's true worth. And it's for this reason that overpriced stocks look attractive and underpriced stocks look risky when prices are high and rising. Our system one brain thinks, well, something must be going right, even if the fundamentals don't justify it. Underpriced stocks on the other hand, feel risky because of a low or falling price anchors our thinking towards negative narratives, making a search for reasons why the market might just be right. In both cases, the anchor distorts our judgment by reversing the proper order of analysis, Letting price inform value instead of letting value inform Price I think we're all at least somewhat prone when it comes to our entry price of a stock. If we've decided that deteriorating fundamentals are a reason we want to exit. But now that the stock price is down, we don't want to sell at a big loss. We would rather wait it out, assuming that soon the stock price will recover and get closer to our entry price. So then we can exit. The tough reality is that the market does not know and does not care what price you paid for the company. We have all these feelings and emotions related to the stocks in our portfolio and but the stock doesn't know or care. We own it. When choosing to hold or sell an investment, it's best to ignore what your initial purchase price was because your initial purchase price has no effect on the true underlying value of the company. If you realize you've made a mistake in purchasing a company, it's oftentimes best to just cut your losses and move that capital to opportunities that are more likely to compound your wealth. From here, Buffett once shared the wise words that it's often a mistake that to try to make your money back the way you lost it, you can think of gamblers at the roulette wheel. A gambler who's lost their money can be tempted to go back to the roulette wheel to make it back the way they lost it, which is an inherent part of our human nature. So, turning to another bias that I see all too often, we have the availability bias. This is the tendency to judge the likelihood of something based on how easily examples come to mind. Instead of thinking statistically, our brains rely on what feels recent or sparks an emotional response. If something is easy to recall, we assume it must be common or important, even if it has no real importance. This also reminds me of the recency bias as well. One of the most available things about a stock is of course, the stock price. So naturally, since it's so available and tells us whether investors are making or losing money on the day, it will be used as a proxy to judge whether the news is good or bad. So earnings reports are a perfect example of this. So after checking the headline numbers, investors tend to immediately check how the market reacted to the report instead of coming to their own conclusions. Our brains are designed to seek the path of least resistance. It takes time and it takes work. To read through an earnings report, tune into the earnings call, work those into your current view of the company and how things are developing. It's much easier to just check the stock price and make an assessment of the report based on that. Kahneman explains that the availability bias is especially strong when events are dramatic or widely discussed. For example, after seeing news coverage of a plane crash, people tend to overestimate how dangerous flying is, even though driving is statistically far riskier. The problem isn't that our brains are irrational, is that they're designed to respond to what grabs our attention, not exactly what's most likely. And in today's world, attention is often shaped by headlines, social media and emotionally charged stories. This bias has huge implications for stock investing because financial markets are saturated with headlines and information. Investors constantly see breaking news, earnings surprises, analyst upgrades, and volatile day to day price movements. When a stock is soaring, it becomes mentally available and investors start to feel like it must be a great opportunity. When the stock's crashing, that decline becomes salient and people assume the business must be permanently broken. Availability bias also explains why investors tend to overweight recent events and underweight the base rates. After a market crash, people become convinced that another crash is just around the corner. After a long bull market, investors start to believe that stocks only go up. In both cases, the most recent experience dominates perception and the future starts to feel like a continuation of whatever just happened. This is one reason why investors often buy high during euphoric periods and sell low during fearful ones. To wrap up the episode, I wanted to talk a little bit about Constellation Software and what is happening in the software industry overall with this AI wave. Constellation has been a company that has captured many people's attention due to its high returns it's delivered to shareholders and its long track record of compounding capital. The company never had a significant drawdown over the past 20 years or so until just recently when there's been, you know, just massive wave of selling. Here as the time of recording the CSU shares that are traded on the Toronto Stock Exchange, they're down by over 50% since the high in May of 2025. For about a year now, the software sector overall has seen declines in its share prices due to AI fears. And with each new announcement from all these AI companies, software stocks just seem to keep sliding and sliding. So the IGV index, which is a software index, it has seen significant selling pressure as there's been record volumes, and it's the most oversold it's been in about a decade. So I first initiated a position in Constellation back in early 2023 and just by happenstance, the shares were trading at a similar price back then to where they are today. This drawdown is primarily driven by two factors. So first you have the company's founder and president, Mark Leonard. He stepped down in recent months. And then second is the fears related to AI, which has led to many software companies selling off in recent months. On the first point, I wanted to share a line from Sequoia Capital's year end letter that I thought was just beautifully written and I wanted to share. Here they write. Leonard is a combination of intellect, agency diligence, humility and decency we are not sure we have ever found so concentrated in any individual CEO. Very few founders get a company off the ground. Very few then grow that company successfully over 30 years. Very few CEOs truly care about the value they deliver for the common shareholder. Very few are both introspective and worldly enough to understand when and and how to increase their circle of competence and to change their minds and pivot when necessary. Very few CEOs build up such capable leadership talent that they can be trusted to be CEOs of their own companies, both inside and outside of the mothership. Mark Leonard has done all of these things. What's more, starting in January 2015, Mark has taken zero salary, bonus or reimbursement of any kind, while delivering nearly 800% returns to shareholders. We have been honored to invest with Mark Leonard and we wish him a full and speedy recovery. Notwithstanding our admiration for Mark Leonard, we believe former COO Mark Miller is eminently qualified to take the CEO reins. He was the co founder of the very first acquisition Constellation ever made, and he grew his branch of the Constellation tree in exemplary fashion over the subsequent 30 years. While Mark Leonard was an investor who learned the software business over those decades, Mark Miller was a developer who learned to be an investor. Mark Miller's background as a developer should give him extra depth and credibility to help the company navigate what it means to write and maintain software in an AI enabled era. So I'll be sure to get that letter linked in the show notes for those who are interested in checking it out. I found it to be very insightful. So Constellation's also been discussed extensively in our mastermind community and one of our members shared a chart that I thought was really interesting. So it essentially shows the institutional flows between software stocks and more of these hardware plays like Semiconductors and semiconductor equipment stocks. And over the past year, flows to software have fallen significantly and the hardware or AI bets have increased significantly. So this highlights how momentum driven our market can be. Based on my experience, it seems that many institutional investors can like a stock like Constellation. But if the short term flows like what I just mentioned, they aren't playing to their favor, then they just won't bother with the stock. Many institutional investors have this pressure to perform in the near term to try and keep their investors happy. And then I hear from some institutional investors who were some of the biggest Constellation bulls I know, and they've also held the stock for years and yet they sold out because of these momentum based flows in order to appease shareholders. It reminds me of the quote from Thomas Phelps in his book 100 to 1 in the stock Market. He essentially said that you shouldn't make an investment decision for a non investment reason. So as a value investor, I interpret that as don't sell an investment for something that is unrelated to the actual business and its underlying thesis. So if you decide that Constellation will get disrupted by AI, then sure, it might make sense to sell. But in this situation where these institutional investors are selling for non investment reasons like momentum or flows, this is the type of situation where you can get these big mispricings. We have a member of our community who runs a VMS acquirer and he's a former portfolio manager at Constant. And he's personally seeing a lot of opportunities for these VMS businesses to utilize AI to enhance their business. And so far he wasn't seeing much of a threat in terms of disruption. So this member talked about how the companies he manages now have all these tools available to them that allow them to pursue new opportunities that would have been projects that would have been too cumbersome or too time consuming to pursue. But now AI, all of a sudden it makes some of these opportunities more attractive. Now can somebody else replicate a certain piece of software or technology and just roll it out? Of course. But it needs to be compliant with ever changing laws and regulations, needs to be updated as the industry evolves and customer needs change. And the customer needs it to work essentially all the time. And then one of our other members who worked at Microsoft for more than two decades, he highlighted that SaaS stands for software as a Service. Part of a VMS product is the servicing of it. You need a professional vendor that understands all of the complexity that goes into a highly specialized software solution. Could the customer switch to a similar solution? That's half the price. Or they could develop maybe a solution for themselves. Sure, but there are significant costs of switching to a new software. So part of what a customer is paying for is also ensuring that the solution works. And if the solution were to ever break, then it gets fixed rather quickly. AI lowers the cost of software development, but there's much more to building a software business than just creating software. Another ingredient, for example, is distribution. You can have the best software in the world, but if you can't distribute it and acquire customers, then it might as well be useless. Since the solutions that Constellation offers are mission critical and they're essential to their customers operations, it would be very difficult to convince a lot of them to switch to another solution because what they have already works fine. There are switching costs and risk involved in switching. And Constellations built trust with several of these customers for decades. So there's little incentive to switch unless the new solution is was significantly better. Another part of the bull thesis for Constellation is that with these software valuations falling, they may be able to find more opportunities for more attractive deals. So one of their recent purchases was in Japan. And based on what I was hearing, the founders sold the business because they essentially believe that AI is going to disrupt all of software. So they decided to get out before the tide fully turned. If everyone's afraid to touch software companies, then that should provide no shortage of opportunities for Constellation to do more deals. Lastly, Constellation has managed VMS businesses for over 30 years now. Their new CEO Mark Miller was a developer who learned to be an investor after joining Constellation. And him and the other leaders at the company have lived through multiple eras of software. Code has been updated and rewritten to adapt to ever changing customer needs. And the rise of AI will present another opportunity for them to navigate this dynamic market environment. If Constellation is able to utilize AI to deliver more value to its customers, then you know, it could be a tool for improving its market position. In the Sequoia letter they wrote, Constellations companies certainly cannot stand still. We would argue that they have never been able to stand still. That they haven't, and that they are not standing still now. Mark Miller has already revved up the company's test and learn culture to comprehend and adopt AI. They have not found any areas where AI has hurt their businesses yet, but they are on the lookout. Mark wants Constellation's businesses to disrupt themselves if they must. He's set a task for all Constellation units to try to solve new problems for their customers with AI and generate new revenue from AI. End quote. So one thing I would like to see from management is purchasing shares on the open market. So as the shares of the Constellation family of companies have declined, we haven't seen a lot of major buying from the management team, which I think could help improve investor sentiment. Turning the other way. So if the management team believes in the opportunities that lie ahead for the company, then I as a shareholder would prefer to see them put more money behind that belief. So as of the time of recording Constellation trades at a high teens multiple of 2026 earnings. So if they're able to continue this acquisition strategy and prevent their existing businesses from being disrupted, then I believe this valuation is compelling. So with that I think we'll close out the episode there. It will be quite interesting to see how the Constellation story continues to play out. Thanks a lot for tuning in and I hope to see you again next time.

Clay Fink (63:57)

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