Before bottom fishing, first understand the two types of market drawdown Author: Todd Wenning Compiled: Deep Tide TechFlow Deep Tide Introduction: Academic financial theory divides risk into systemic risk and idiosyncratic risk. Similarly, stock pullbacks can be divided into two types: market driven systematic pullbacks (such as the 2008 financial crisis) and company specific characteristic pullbacks (such as the software stock crash caused by current AI concerns). Todd Wenning used FactSet as an example to point out that when there is a systematic pullback, you can take advantage of your behavioral advantage (patiently waiting for the market to recover); But when it comes to trait pullback, you need to analyze the advantages - the company's vision for ten years is more accurate than the market. In the current era of AI impacting software stocks, investors must distinguish: is this a temporary market panic, or is the moat really collapsing? Do not use blunt behavioral solutions to solve problems that require delicate analysis. Academic financial theory suggests that there are two types of risks: systemic and idiosyncratic. Systemic risk is an inevitable market risk. It cannot be eliminated through diversification, and it is the only type of risk for which you can receive rewards. On the other hand, trait risk is a company specific risk. Because you can purchase diversified investment portfolios of unrelated businesses at a low cost, you will not receive returns for taking on this risk. We can discuss modern portfolio theory another day, but the systemic trait framework is helpful for understanding different types of drawdown (percentage decrease from peak to trough of investment) and how we as investors should evaluate opportunities. Since we picked up our first value investing book, we have been taught to take advantage of the depressed Mr. Market when selling stocks. If we remain calm when he loses his sanity, we will prove ourselves to be resilient value investors. But all withdrawals are not the same. Some are market driven (systemic), while others are company specific (idiosyncratic). Before you act, you need to know which type you are looking at. The recent software stock sell-off caused by concerns about AI in Gemini illustrates this point. Let's take a look at the 20-year drawdown history between FactSet (FDS, blue) and S&P 500 (measured by SPY ETF, orange). Source: Koyfin, as of February 12, 2026, FactSet's drawdown during the financial crisis was mainly systematic. In 2008/09, the entire market was concerned about the durability of the financial system, and FactSet was also affected by these concerns, especially as it sold products to financial professionals. At that time, the pullback of stocks had little to do with FactSet's economic moat, but more to do with whether FactSet's moat was important if the financial system collapsed. The FactSet drawdown in 2025/26 is the opposite situation. Here, concerns are almost entirely focused on FactSet's moat and growth potential, as well as widespread concerns about accelerated AI capabilities disrupting the pricing power of the software industry. In systematic drawdown, you can make more reasonable time arbitrage bets. History has shown that markets often rebound, and companies with complete moats may even be stronger than before, so if you are willing and able to be patient when others panic, you can use your strong appetite to take advantage of behavioral advantages. The photo was provided by Walker Fenton on Unsplash. However, in the trait pullback, the market tells you that there is a problem with the business itself. Especially, it implies that the ultimate value of the business is becoming increasingly uncertain. Therefore, if you wish to utilize trait pullback, you need to have analytical advantages in addition to behavioral advantages. To succeed, you need to have a more accurate vision of what the company will look like ten years from now than market prices suggest. Even if you know a company well, it's not easy to achieve. Stocks usually do not drop 50% relative to the market for no reason. Many once stable holders - even some investors whom you respect for their in-depth research - had to surrender in order for this situation to occur. If you want to intervene as a buyer during the trait pullback period, you need an answer to explain why these previously informed and thoughtful investors were selling incorrectly, and why your vision is correct. There is only a thin line between faith and arrogance. Whether you hold stocks that are in a drawdown or want to start a new position in them, it is important to understand what type of bet you are making. Trait pullback may induce value investors to start seeking opportunities. Before embarking on your adventure, make sure you are not using blunt force behavioral solutions to solve problems that require delicate analysis. Maintain patience and focus. Todd