Public serial acquirers like Constellation Software exploit a valuation arbitrage. They buy private niche businesses at low multiples (e.g., 5x EBITDA) which are then automatically revalued at the parent company's much higher public market multiple (e.g., 28x EBITDA), creating significant shareholder value on day one.

The downturn in software stocks isn't tied to current earnings. Instead, investors are repricing the entire sector, removing the premium they once paid for its perceived safety and stable, long-term contracts, which are now threatened by AI disruption.

In the world of hyper-short-term pod shops, a stock being "cheap" is a sign of a broken thesis, not a value opportunity. This highlights a fundamental philosophical divide where traditional value investors see opportunity, while pods see a reason to sell immediately.

The textbook value investing response—buying more as a stock falls—is often impractical. In firms focused on short-term performance, a stock dropping from $70 to $30 after a buy recommendation can get an analyst fired, even if the thesis is ultimately correct. This institutional pressure shortens time horizons.

Publicly defending a stock in investor letters can tie a manager's ego to the position, making it hard to admit a mistake and sell. Some great managers minimize their letters to avoid "painting themselves into a corner," retaining the flexibility to change their minds and seize better opportunities.

Short-term performance pressure forces fund managers to sell underperforming stocks, creating a self-fulfilling prophecy of price declines. Investors with permanent capital have a structural advantage, as they can hold through this volatility and even buy into the weakness created by others' behavioral constraints.

Investor uncertainty about the long-term viability of software business models due to AI is causing a fundamental shift in valuation. Instead of paying a premium for future growth, investors are now demanding immediate returns like dividends, effectively treating established software firms as value stocks rather than growth stocks.

Even sophisticated institutional investors exhibit significant behavioral biases. Research on their trades revealed that while their buying decisions added value, their selling decisions were so poor that a random selling strategy would have outperformed their actual sales by 100-200 basis points. They seem to apply discipline to buying but not selling.

The recent software stock sell-off is rooted in investors' inability to confidently price long-term growth (terminal value). While near-term earnings might be strong, the uncertainty of future business models due to AI is causing a fundamental reassessment of what these companies are worth.