Great breakdown, Todd really appreciate how you distinguished between the behavioral advantage needed for systematic drawdowns and the deeper analytical advantage required for idiosyncratic ones. The FactSet comparison is a perfect illustration of how the “why” behind a price drop changes the required due diligence.
Since we are seeing more sector-wide volatility lately, do you think there’s a “third” middle ground where a drawdown starts as systematic (sector-wide AI fears) but eventually forces an idiosyncratic re-rating of the business's terminal value?
Great post, Todd. It’s also interesting how certain industries seem to provide recurring opportunities. I find that every 3-5 years or so, high quality large cap banks get sold off for systemic reasons and allow investors to buy at 8 P/E or some similar cheap price.
Thanks, John! Yes, agreed. If you have built up a deep understanding of a particular industry, you can more confidently express both your behavioral and analytical edge in that type of drawdown. I've seen it happen with LTL and video games again and again, too.
Where do you draw the line for idio vs systematic? The drawdown chart might look a bit more systematic if compared to other data cos / software etc? Definitely appreciate the point you're making and agree to a large extent, but drawdowns for a sector / broad peer group can also have a systematic element to them where the opportunity is the proverbial baby in the bathwater? (Not that Factset would necessarily be said baby in the current drawdown, mind...)
It's a good question, William. Copart (which I own) might have been a cleaner example of an idiosyncratic sell off versus FDS given the current broader software sell-off. While the current software sell-off isn't systematic, it isn't strictly unique to FDS, either, as terminal values are being questioned across the software space. Even so, the FDS example highlights that when a specific sub-industry sells off for fundamental reasons, you need both an analytical and behavioral thesis before stepping in.
Great breakdown, Todd really appreciate how you distinguished between the behavioral advantage needed for systematic drawdowns and the deeper analytical advantage required for idiosyncratic ones. The FactSet comparison is a perfect illustration of how the “why” behind a price drop changes the required due diligence.
Since we are seeing more sector-wide volatility lately, do you think there’s a “third” middle ground where a drawdown starts as systematic (sector-wide AI fears) but eventually forces an idiosyncratic re-rating of the business's terminal value?
Great post, Todd. It’s also interesting how certain industries seem to provide recurring opportunities. I find that every 3-5 years or so, high quality large cap banks get sold off for systemic reasons and allow investors to buy at 8 P/E or some similar cheap price.
Thanks, John! Yes, agreed. If you have built up a deep understanding of a particular industry, you can more confidently express both your behavioral and analytical edge in that type of drawdown. I've seen it happen with LTL and video games again and again, too.
Where do you draw the line for idio vs systematic? The drawdown chart might look a bit more systematic if compared to other data cos / software etc? Definitely appreciate the point you're making and agree to a large extent, but drawdowns for a sector / broad peer group can also have a systematic element to them where the opportunity is the proverbial baby in the bathwater? (Not that Factset would necessarily be said baby in the current drawdown, mind...)
It's a good question, William. Copart (which I own) might have been a cleaner example of an idiosyncratic sell off versus FDS given the current broader software sell-off. While the current software sell-off isn't systematic, it isn't strictly unique to FDS, either, as terminal values are being questioned across the software space. Even so, the FDS example highlights that when a specific sub-industry sells off for fundamental reasons, you need both an analytical and behavioral thesis before stepping in.
i hope this means a non-paywalled follow-up on cprt in this perspective !
I would really love a write up on Copart..