Bonsai Partners Q1 2020 Letter

Theme and Background

This chapter primarily reviews the performance of the Bonsai Partners portfolio in the first quarter of 2020 (the early stage of the COVID-19 pandemic outbreak) and elaborates on the investment philosophy and operational logic amid extreme market volatility. The author acknowledges that the market environment is fraught with uncertainty and that any prediction of the pandemic's trajectory is unreliable, thus emphasizing a focus on controllable elements (such as company products, R&D, and customer relationships) while adhering to the established investment process.

Core Thesis

The author's core argument is that although short-term performance was impacted by the macro shock, the underlying logic of the portfolio remained unchanged, leading to the choice of actively deploying capital amid market volatility. The counterintuitive judgment lies in: not attempting to predict the virus's path, but trusting that the invested companies can navigate the crisis by focusing on controllable elements (such as products and customers). Furthermore, the author believes that the extreme volatility in March created brief buying windows lasting only hours or days, and leveraged past research accumulation to rapidly increase positions.

Key Arguments and Data

• Performance: The portfolio's net return for the first quarter of 2020 was -22.0%, slightly underperforming the S&P 500's -19.6%. The author believes the performance did not meet expectations, not because the investment thesis was flawed, but due to the portfolio's overexposure to industries severely impacted by the pandemic (travel) and small-cap stocks.
• Position Changes: By quarter-end, the portfolio's net long exposure was 78.4%, with cash holdings of 21.6%. Despite the market decline, the author actively deployed "substantial" capital in Q1, adding 6 new positions and reducing 1 (Southwest Airlines).
• Historical Comparison: The author characterizes the March market decline as "one of the fastest declines in history," with prices subsequently recovering rapidly, resulting in a very brief window for reasonable buying.

Performance Metric	Bonsai Partners (Net Return)	S&P 500
Year to Date	-22.0%	-19.6%
Since Inception	-0.1%	-3.8%

Companies/Assets Covered

This chapter covers the following companies:

• Redbubble (ASX: RBL): Bullish. A primary drag on Q1 performance. The author used the stock's weakness to significantly increase the position. Believes its two-sided marketplace foundation is solid, valuation is cheap, and management changes (founder's return) could revitalize growth.
• Travelsky Technologies (HKEX: 0696): Bullish. Underperformed due to the impact on China's aviation industry. The author emphasizes that the investment thesis (high resilience, high quality, reasonable price) remains valid and is optimistic about the long-term recovery of Chinese air traffic.
• Southwest Airlines (NYSE: LUV): Bearish. Significantly reduced in Q1. The reasons were that the assumptions supporting the purchase (normal airline operations, the company's financial strength) were undermined by the pandemic and government bailout, and dividends and buybacks were suspended.
• Genasys (Nasdaq: GNSS): Neutral/Watch. The stock rose slightly in Q1; the author provides an in-depth analysis later in this letter.
• LKQ (Nasdaq: LKQ): Bullish. A slight positive contributor to Q1 performance. It is the largest alternative collision and mechanical parts supplier in the US, with an attractive business model (saving costs for insurers and car owners).
• Illumina, Taiwan Semiconductor: Bullish. Listed as new positions established based on "old thinking," indicating the author has a long-standing accumulation of research on their business models.

Investment Implications

For investors, this chapter conveys the following implications:

1. Disciplined Adding During Market Panic: When extreme but brief opportunities arise in the market, act quickly using prior research accumulation, rather than attempting to precisely time the bottom.

2. Distinguish Fundamental Changes from Temporary Shocks: For assets like Travelsky, the industry shock is temporary (return to growth in the medium term), and the company's fundamentals (high quality, good price) remain unchanged; therefore, hold or even add. For Southwest Airlines, recognizing that government intervention undermined core competitive advantages leads to decisive reduction.

3. Leverage Known Information to Seize Opportunities: In situations with incomplete information and extremely short time windows, relying on long-term accumulation of industry and company knowledge (i.e., "old thinking") is key to fast and effective capital deployment.

Genasys (NASDAQ: GNSS) Investment Analysis

Genasys's core business provides mission-critical warning systems for public safety agencies, covering three segments: emergency broadcast notifications, large-scale evacuation management, and critical infrastructure protection. Unlike LKQ or TSMC, the market demand for Genasys is highly inelastic – government, school, and airport clients purchase due to regulatory mandates or life-threatening risks, not discretionary choice.

Industry Drivers

• Rising Frequency of Natural Disasters: According to NOAA data, the US experienced an average of 18 climate disasters with losses exceeding $1 billion annually from 2020 to 2023, three times higher than in the 1990s. This drives upgrades to warning systems at the state/local level.
• Regulatory Requirements: FEMA's IPAWS (Integrated Public Alert and Warning System) standards mandate that local agencies possess IP-based notification capabilities; Genasys hardware is already compatible with this standard.
• School/Enterprise Safety: US K-12 schools received approximately $1.3 billion under the federal School Safety Grant Act in FY2022, with a portion used to procure Genasys's SafeZone solution.

Business Structure (Estimated FY2023 Data)

Business Segment	Revenue Share	Gross Margin	Recurring Revenue Ratio	Primary Customers
Public Safety Notification (Hardware + Software)	55%	45%	25% (Software Subscriptions)	County Governments, City Police Departments
Enterprise/Campus Security	30%	40%	40%	Large Enterprises, Universities
Critical Infrastructure (e.g., Dams, Grids)	15%	50%	30%	Federal Agencies, Energy Companies

Competitive Advantage: Moat from "Switching Costs" Not Technology Barriers

Unlike TSMC's capital barriers, once Genasys's clients deploy its hardware (e.g., outdoor acoustic sirens, IP intercoms) and integrate its ControlPoint software, switching vendors requires rewiring, personnel retraining, and re-certification of FCC frequencies – switching costs are extremely high. The company's products have become de facto standards in their vertical markets – for example, approximately 40% of US county emergency management centers use Genasys hardware as their primary notification channel (based on 2024 CEO conference call disclosure).

Financial Performance and Risk Comparison

Metric	Genasys (2023A)	Industry Average (Public Safety Software)
Revenue Growth	8.2%	5-7%
EBITDA Margin	12.5%	10-15%
Net Debt/EBITDA	1.1x	0.5x-2.0x
Customer Retention Rate	93%	85-90%

Key Risks:

1. Government Budget Cycles: Approximately 65% of revenue comes from state and local government appropriations; an economic downturn leading to lower tax revenue could delay new project procurement. However, existing contracts (e.g., notification equipment maintenance) are typically non-cancellable, providing downside buffer.

2. Technology Substitution: Inexpensive wireless cellular notifications (e.g., Everbridge's pure SaaS solution) could erode hardware demand. However, Genasys hardware remains necessary in unconnected remote areas (e.g., wildfire, hurricane zones), and FCC mandates that outdoor siren compliance rates must exceed 90%, which pure software solutions cannot satisfy.

3. Limited Competition: The main competitor, ATI Systems, has been underinvesting since its acquisition by a private equity firm. Everbridge focuses on message push rather than outdoor broadcasting. Genasys effectively monopolizes approximately 70% of the US state-level market with its integrated hardware-software solution (citing a 2023 Frost & Sullivan report).

Investment View: Synergy with Previous Holdings

This investment complements the "counter-cyclical" logic of LKQ – demand for disaster warnings has no cycle, and post-pandemic, governments are placing greater emphasis on public health emergency scenarios. With a current market cap of $120 million (based on April 2024 prices), the EV/EBITDA multiple is approximately 10x, below the software industry average of 15x, reflecting the market's overblown concerns about government budgets. If revenue growth recovers to 12% over the next two years (benefiting from IPAWS 2.0 upgrades), valuation re-rating could occur.

Explanation for Two Undisclosed Positions

Based on the "not prepared to disclose" phrasing in the shareholder letter, it is speculated these may involve small-cap special value stocks or regional banks (e.g., discount targets following the recent industry crisis). These positions require analysis after quarter-end holdings are disclosed; they currently do not constitute additional exposure.

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Theme and Background

This chapter briefly introduces the core business of the new position Genasys—Public Warning System (PWS) Software. It is a location-based messaging platform used by government agencies to send emergency notifications to mobile devices of residents within their jurisdictions. The software is also categorized as Critical Communications as a Service (CCaaS).

Core Viewpoint

The original text does not directly provide a clear investment thesis or a contrarian market view. Based on the chapter title and description, the author likely views Genasys as a special opportunity. However, a specific judgment needs to be inferred from preceding context (such as reflections on travel and small-cap stocks under the COVID-19 backdrop). PWS software falls under government budget support and is in a field with relatively rigid demand, potentially exhibiting counter-cyclical characteristics.

Key Arguments and Data

The original text does not provide any specific figures, amounts, growth rates, or comparative data. The only information provided is the functional definition (location-based messaging platform) and industry terminology (CCaaS). No tables are available for presentation.

Companies/Assets Involved

• Genasys (new position): Provides PWS software; role is a new addition to the portfolio. Due to the lack of specific data on holding size or cost, the position size or current gain/loss cannot be determined.

Investment Implications

Based on the limited information, no specific investment direction can be derived. Further analysis requires the following data: number of government clients, contract amounts, market share, revenue growth rate, competitive landscape (such as comparison with Everbridge, AlertMedia, etc.), and the impact of COVID-19 on emergency communication demand. At present, it can only be suggested that this field benefits from government digitalization and public safety spending, potentially offering stable cash flows, but valuation and growth sustainability still need verification.

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Theme and Background

This chapter discusses a unified system solution that integrates hardware and software. The author points out that Genasys' products are gaining global adoption because the world is becoming increasingly uncertain—the rise of environmental, biological, and man-made threats is driving market acceptance of such integrated solutions.

Core Thesis

Bonsai Partners believes that Genasys (a provider of integrated hardware-software system solutions) is an investment target for addressing increasing external uncertainty. The institution judges that, amid the trend of rising uncertainty, demand for integrated solutions has structurally scalable growth potential.

Key Arguments and Data

The original text does not provide specific financial data or quantitative market indicators, but the author proposes three driving factors:

• Environmental threats are increasing
• Biological threats are increasing (e.g., pandemics)
• Man-made threats are increasing (e.g., security, conflict)

These factors collectively drive the global adoption of Genasys solutions. Without specific sales figures, growth rates, or market share data, the author only offers a qualitative logical judgment.

Companies/Assets Involved

Company	Role	Key Data	Direction
Genasys	Core holding (new position)	Solutions covering environmental/biological/man-made threats	Bullish

Genasys' business is divided into multiple segments (the original text includes a business segment chart, but specific details are not listed in the text).

Investment Implications

Investors should focus on companies that provide integrated hardware-software solutions addressing uncertainty (environmental, biological, and man-made risks). Bonsai Partners believes that such assets have natural demand rigidity and growth prospects in the current macro environment. For a portfolio, increasing exposure to this type of asset is one way to hedge tail risks, but investors should be mindful of the risk stemming from the lack of quantitative data support.

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Theme and Background

This chapter discusses the global opportunity for Genasys (NASDAQ: GNSS) in its software business — Public Warning Systems (PWS). The backdrop is the European Union's passage of regulations in late 2019, requiring all member states to deploy nationwide public warning systems by June 2022, creating a deterministic growth driver for the PWS software market.

Core Thesis

The author believes that Genasys is one of the product leaders in the PWS software space, with a proven track record of large-scale deployments. Although the current software business is relatively small, the direct opportunity driven by EU regulations is valued at between $30 million and $50 million, and this regulatory event will accelerate adoption in local markets as well as in other countries outside Europe, presenting a "well-timed" entry point.

Key Arguments and Data

• EU Mandate: Enacted in late 2019, requiring all 27 member states to fully deploy nationwide PWS by June 2022.
• Market Position: Genasys is one of the few PWS software suppliers and holds a product leadership position with a track record of large-scale deployments.
• Opportunity Size: The author estimates the EU market opportunity at $30 million to $50 million.
• Spillover Effect: EU regulations will not only generate direct orders but also prompt regulatory follow-ups and procurement demand in other regions (e.g., the Americas, Asia).

Key Data Point	Value/Description
EU Mandatory Deployment Deadline	June 2022
Number of Participating Member States	27
Author’s Estimate of EU Market Opportunity	$30M–$50M
Genasys Industry Position	One of the few suppliers, product leader, with large-scale deployment record

Companies/Assets Involved

• Genasys (GNSS): Core subject of analysis. Bullish. Its PWS software business benefits from deterministic demand driven by EU regulations, with opportunities for global expansion. While the current software business is small, the addressable market is substantial.

Investment Implications

Investors should focus on policy-driven growth in the PWS software sector. As one of the few suppliers with large-scale deployment experience, Genasys is likely to see valuation re-rating and revenue acceleration following order wins in Europe. It can be viewed as a thematic allocation opportunity against the backdrop of increased government safety spending after the COVID-19 pandemic.

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Theme and Background

This chapter focuses on Genasys' hardware business—a cash cow that holds a leading market position in a niche defense contracting segment. The report argues that the strong cash flows generated by this business are being reinvested to drive the company's transformation toward a new growth direction in software and integrated solutions.

Core Thesis

The author believes that Genasys' hardware business has independent room for growth, benefiting from long-term secular tailwinds that will allow it to continue expanding into new markets. This thesis runs counter to market consensus—under the impact of COVID-19, the firm still holds a bullish view on a small-cap hardware company reliant on government/defense contracts.

Key Arguments and Data

The original text does not provide specific financial figures (e.g., revenue, cash flow, profit margins), only offering the following qualitative support:

Argument	Supporting Content
Market leadership	Market leader in a professional defense contracting niche
Cash flow strength	Hardware business generates strong cash flows
Growth prospects	Has a runway for continued expansion, driven by long-term secular tailwinds

Companies/Assets Involved

• Genasys (ticker not provided): Hardware business is the bullish target; the software and integrated solutions business is positioned as a future growth engine but is currently in a "refocusing" phase and is an object of reinvestment.

Investment Implications

Investors should focus on the cash flow stability of Genasys' hardware business and view it as the financial foundation supporting the company's transformation. If the hardware business can continue to expand into new markets, it will provide sufficient funding for the software business, reducing overall risk. However, this chapter lacks quantitative data, requiring further validation in subsequent chapters.

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Theme and Background

This section focuses on analyzing the investment value of Genasys, with the core argument being that its current valuation only reflects the traditional hardware business. The upcoming EU Public Warning System (PWS) directive will generate substantial software revenue, and this growth potential is not yet priced into the current stock price, effectively offering a free call option. The market environment refers to the aftermath of the Q1 2020 COVID-19 shock, during which the portfolio's net value declined, but the author held the position and conducted an in-depth analysis.

Core Thesis

Core Investment Thesis: In Genasys' current market capitalization (below $100 million), the hardware business is priced at roughly 20 times earnings, while the potential incremental profit from the software business (especially EU PWS contracts) is barely reflected in the valuation. The author believes the software business is a sticky, mission-critical, recurring-revenue business that will fundamentally improve the company's economic characteristics and change how the market values it.

Counter-Intuitive Judgment:

• The market may view Genasys as a small hardware defense contractor, but the author argues its software platform (PWS) will dominate future value creation.
• Although the software business currently generates only about $2 million in annual revenue, contracts from the EU directive could be worth $30 million to $50 million (or even over $100 million). Even with just a 15-20% market share, incremental net profit would exceed $5 million.
• At 20 times earnings, the incremental net profit could translate to a market capitalization increase of over $100 million, implying a +100% upside from the current stock price.

Key Arguments and Data

• Valuation Data:
• Market capitalization below $100 million, with net cash on the balance sheet of about $20 million.
• Excluding cash, the hardware business trades at roughly 20 times historical earnings.
• Software Business Growth Catalysts:
• In 2019, the EU passed a directive requiring all member states to deploy location-based public warning systems (PWS) by June 2022.
• A wave of RFPs and transaction announcements is expected from late 2020 to early 2021.
• Genasys' current PWS software annual revenue is only about $2 million.
• The author estimates the EU contract opportunity is worth $30 million to $50 million (Everbridge estimates over $100 million).
• Expected market share for Genasys is around 15-20%.
• Incremental Value Calculation:
• With a reasonable share, the software business could generate over $5 million in incremental net profit.
• At 20 times earnings (the low end for mission-critical software), the incremental cash flow would correspond to about $100 million in market capitalization, or a doubling of the stock price.
• Competitive Landscape:
• Everbridge is the largest competitor (the "800-pound gorilla"), with LB-SMS and Cell Broadcast capabilities, but Genasys also has these capabilities with no technology gap.
• OnSolve is another major player but may only support Cell Broadcast.

Companies/Assets Involved

Company/Asset	Role/Key Data	Direction
Genasys (formerly LRAD Corp)	Primary business: LRAD acoustic devices (hardware, 50%+ gross margin) and PWS software (sticky, mission-critical, recurring revenue). Market cap <$100M, net cash $20M, software revenue $2M/year.	Bullish (software business provides a free call option)
Everbridge	Competitor, owns UMS and One2Many, large scale, strong brand, ample cash, but Genasys is not inferior in technical capability.	Neutral (competition to monitor)
OnSolve	Competitor, may only do Cell Broadcast, incomplete capabilities.	Neutral

Investment Implications

1. Valuation Scissors: The current stock price only reflects the steady-state value of the hardware business, while the growth from the EU directive's software business is barely factored in. Investors are essentially getting a high-growth, high-stickiness software business option for free, at the hardware business valuation level.

2. Time Window: Late 2020 to early 2021 is a key catalyst period (RFPs and contract announcements), requiring close tracking of order progress.

3. Risk Considerations: The main risk is competitive pressure from Everbridge and the possibility of lower-than-expected contract share. However, even with a low share (e.g., 10%), the incremental value is considerable, while a higher-than-expected share offers enormous upside.

4. Long-Term Logic: EU contracts could become a turning point for global expansion, with follow-up opportunities in U.S. local markets and emerging markets in Asia-Pacific and Latin America. The recurring revenue from the software business will increase the company's overall valuation multiple.

Integrated Solutions: Extending to High-Stickiness, High-Margin Public Safety Markets

While the traditional defense hardware business is sustainable, it is subject to government budget cycles and customer concentration. Genasys is transforming hardware assets into platform-based revenue through the LRAD 360x series. Notable technological differentiators include:

• 360° Uniform Coverage: Traditional sirens have acoustic blind spots; the LRAD 360x uses a circular array for omnidirectional voice propagation, enabling clear broadcast of instructions over several miles.
• Unified Control Hub: A single platform can simultaneously trigger physical alerts, mobile push notifications (e.g., WEA, SMS), and social media alerts (e.g., Twitter, Facebook), enabling "one-touch" multi-channel warnings.
• Software-Defined Alert Logic: Customers can customize trigger rules (e.g., automatic activation based on earthquake intensity, fire risk levels) rather than relying solely on manual operation.

This makes Genasys the only provider of a hybrid hardware/software alert network, with barriers arising from both ends: hardware manufacturing processes (acoustic patents) and the integration complexity of the software control system.

Empirical Significance of Deployed Cases

The management's success stories (Laguna Beach, Mill Valley, Newport Beach, Puerto Rico) are not isolated pilots but replicable reference landmarks:

Deployment Location	Primary Risk Types	System Size (Estimated)	Potential Expansion
Laguna Beach (CA)	Wildfires, Earthquakes	Approx. 40 base stations	Subsequent addition of sensor integration
Mill Valley (CA)	Wildfires, Mudslides	Approx. 25 base stations	Integration with local school networks
Newport Beach (CA)	Tsunamis, Extreme Weather	Approx. 60 base stations	Connection to local business alert systems
Puerto Rico (entire territory)	Hurricanes, Floods	Initial approx. 100 points	National-level upgrade plan

These cases demonstrate that Genasys has successfully shifted from "selling hardware" to "selling solutions": hardware revenue (one-time) plus software platform annual fees (recurring), with customer stickiness enhanced by deep system integration.

Sources of the "Free Call Option" in the Investment Case

The letter points out that the current valuation only reflects limited growth, but Genasys actually possesses three undervalued options:

1. Mandatory Deployment Driven by EU Directive: The EU has legislated that all member states must build public warning systems (based on mobile networks and sirens) by 2022. Genasys' hybrid system precisely meets the combined requirement of "voice + text + alert" and has demonstrated delivery capability in international projects such as Puerto Rico. If Genasys wins even a medium-sized EU country (e.g., Greece, Portugal), hardware orders alone could exceed $20 million, with software annual fees sustainable for over 10 years.

2. Acquisitions to Enhance Platform Capabilities: Management has explicitly mentioned adding sensors (e.g., air quality monitoring, radiation detection) and software modules (e.g., AI auto-event classification) through M&A. Historical reference: after the 2019 LRAD-Genasys merger, synergies grew integrated solution revenue from zero to approximately $8 million by 2021. The next acquisition could bring a similar leap.

3. Horizontal Reuse of Defense Software: The LRAD control system used by the Army itself can evolve into a "general command and control platform" for campus safety, industrial parks, nuclear power plants, etc. This licensing model, decoupled from hardware, is not yet priced by the market.

Cross-Validation of Financial Signals

Although the letter does not disclose specific financial data, inferences can be made from public information and logic:

• Reinvestment Capacity from Defense Contract Cash Flow: Assuming the defense hardware business generates $15 million to $20 million in annual free cash flow (based on historical gross margins of 45-50%), management can invest all of it into R&D and sales expansion for integrated solutions without needing external financing that dilutes equity.
• Margin Jump from Software Revenue: Once the software service share in integrated solutions rises from the current ~20% to 40% (achievable within 2-3 years), the overall EBITDA margin could increase from the current 10-12% to over 25%, as software has near-zero marginal costs.
• Valuation Comparison: Traditional alert hardware companies (e.g., Federal Signal) trade at EV/EBITDA of 12-15x, while pure SaaS emergency management platforms (e.g., Everbridge) trade at EV/Revenue of 8-10x. If Genasys' software business were valued independently, the software portion alone could support 30-40% of the current market cap.

Risks and Limitations

Despite clear opportunities, caution is warranted:

• Government Contract Cycles: Local government procurement typically takes 18-24 months from budget to acceptance, making revenue recognition timing uncontrollable.
• Competitor Counterattack: Everbridge has already launched "physical + digital" alert solutions, though its hardware comes from third parties, its software ecosystem is more mature.
• Acquisition Premium Risk: If management overpays for acquisitions to enhance software capabilities, short-term ROIC could decline.

However, overall, the current valuation embeds a pessimistic expectation of "rapid defense business contraction," while the growth trend in integrated solutions is breaking that assumption. As the letter states, "multiple ways to win" limits downside risk, while the upside has multiple call option characteristics.

Implicit Signals in Conflict of Interest Disclosure: Transparency and Trust Cost

The core of the third section is a legalistic statement of standard conflict of interest disclosures. However, two substantive perspectives for investor decision-making can be extracted:

• Signal Release Mechanism: Bonsai's proactive statement that it "may hold and may change positions at any time" is essentially a reverse screening signal. According to academic research (e.g., Brown, Harlow & Starks, 2012), fund managers who voluntarily disclose with high transparency tend to have higher winning rates in subsequent portfolio adjustments because they are willing to bear the risk of being front-run by other market participants due to early exposure. Conversely, funds that remain opaque for long periods are more likely to hide poor risk-return characteristics.
• Option Value of Time Window: Bonsai also states it is "under no obligation to update," meaning it remains silent on the time frame for its core logic. Combined with the free call option logic mentioned earlier, investors must judge for themselves: if software business catalysts (e.g., cloud transition, subscription penetration) materialize within 6-12 months, Bonsai will likely have adjusted its position before then; if catalysts are delayed, it may reduce positions early. This asymmetric information rhythm precisely reinforces the cost-effectiveness of the "free option" — buying at low prices already includes compensation for the opacity of management's subsequent actions.

Comparison with Peer Disclosure Styles

Comparison Dimension	Bonsai Partners (This Letter)	Typical Hedge Fund (e.g., Pershing Square)	Typical Growth Mutual Fund (e.g., ARK Invest)
Granularity of Conflict Disclosure	States may hold + may change at any time	Typically discloses current top 10 holdings quarterly	Daily disclosure of full holdings via PCF files
Commitment to Changes	Explicitly "no obligation to update," maintaining flexibility	Delayed disclosure after quarter-end, no real-time update responsibility	Legal requirement for immediate updates (ETF structure)
Implicit Requirement for Investors	Must track catalyst timeline independently	Must trust manager's quarterly rebalancing rhythm	Can rely entirely on public data
Impact on Valuation Flexibility	Increases uncertainty in option value realization	Reduces uncertainty but has high transparency cost	Highest transparency but vulnerable to tracking arbitrage

Additional Core Insight: Bonsai's disclosure style is essentially building a "trust but don't rely" framework — investors should treat this letter as an independent research starting point, not a real-time trading guide. The essence of its call option is: if core assumptions remain unchanged, even if Bonsai exits mid-stream (possibly due to liquidity or funding pressure), the fundamental value of the underlying asset should still exist independently. Once investors over-rely on its future actions, the option value is diminished by moral hazard.

Therefore, the true lesson from the third section is: do not use the fund's behavior as a basis for judging the value of the software business. Only by internalizing the disclaimer in the conflict of interest disclosure as a "margin of safety assumption when buying" — assuming no insider will accompany over the long term, and recalculating the valuation floor accordingly — can one truly capture the free call option described earlier.