Author: Todd Wenning; Translator: Deep Tide TechFlow
Academic financial theory categorizes risk into systematic risk and idiosyncratic risk. Similarly, stock drawdowns are divided into two types: market-driven systematic drawdowns (such as the 2008 financial crisis) and company-specific idiosyncratic drawdowns (such as the current software stock crash caused by AI concerns).
Todd Wenning uses FactSet as an example, pointing out that during systematic drawdowns, you can leverage behavioral advantages (patiently waiting for the market to recover); but during idiosyncratic drawdowns, you need analytical advantages—a more accurate vision of the company ten years from now than the market.
In the current context of AI impacting software stocks, investors must distinguish: is this a temporary market panic, or is the moat truly collapsing?
Don't use blunt behavioral solutions to solve problems that require nuanced analysis.
The full text is as follows: Academic financial theory posits two types of risk: systematic and idiosyncratic. Systematic risk is unavoidable market risk. It cannot be eliminated through diversification, and it is the only type of risk from which you can earn a return. On the other hand, idiosyncratic risk is company-specific risk. Because you can cheaply buy diversified portfolios of unrelated businesses, you do not earn a return for taking on this type of risk. We can discuss modern portfolio theory another day, but the systematic-idiosyncratic framework is helpful for understanding different types of drawdowns (the percentage decline from the peak to the trough of an investment) and how we, as investors, should assess opportunities. From the moment we picked up our first book on value investing, we were taught to take advantage of Mr. Market's frustration during stock sell-offs. If we remain calm when he loses his temper, we will prove ourselves to be steadfast value investors. But not all pullbacks are the same. Some are market-driven (systematic), while others are company-specific (trait-based). Before you act, you need to know which type you're looking at. The recent sell-off in software stocks due to AI concerns illustrates this point. Let's look at the 20-year drawdown history between FactSet (FDS, blue) and the S&P 500 (measured by the SPY ETF, orange).

Source: Koyfin, as of February 12, 2026
FactSet's drawdowns during the financial crisis were primarily systemic. In 2008/09, the entire market was worried about the durability of the financial system, and FactSet was not immune to these concerns, especially since it sells products to financial professionals.
... At that time, the stock pullback had little to do with FactSet's economic moat, but rather with whether FactSet's moat would be important should the financial system collapse. The 2025/26 FactSet pullback was the opposite. Here, concerns were almost entirely focused on FactSet's moat and growth potential, and the widespread worry about accelerating AI capabilities disrupting pricing power in the software industry. During systemic pullbacks, you can more rationally make time arbitrage bets. History shows that markets tend to rebound, and companies with strong moats may even be stronger than before, so if you are willing and able to remain patient when others are panicking, you can leverage a strong appetite to take advantage of behavioral strengths.

Photo courtesy of Walker Fenton on Unsplash
However, in a traited pullback, the market tells you that there's something wrong with the business itself. In particular, it suggests that the business's terminal value is becoming increasingly uncertain.
Therefore, if you want to take advantage of traited pullbacks, you need to have an analytical advantage in addition to a behavioral advantage.
To succeed, you need to have a more accurate vision of what the company will look like ten years from now than what the market price currently implies.
Even if you know a company very well, this is not easy to do.
Stocks don't typically fall 50% relative to the market for no reason. This happens when many previously stable holders—even some you might respect for their thorough research—have to give in. If you're going to step in as a buyer during a traited pullback, you need an answer to why these previously well-informed and thoughtful investors were wrong to sell, and why your vision is correct. There's a fine line between conviction and arrogance. Whether you're holding a stock in a pullback or looking to start a new position, it's important to understand what kind of bet you're making. Traited pullbacks can tempt value investors to look for opportunities. Before you take the plunge, make sure you're not using a blunt, behavioral solution to a problem that requires nuanced analysis. Be patient, stay focused.