cluster Clustering is widely applicable in many fields outside market which make its application to markets even more useful It also resembles to Pareto Principle In market context price moves clusters ID: 1043625
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1. CLUSTERINGTrouble runs in streaks – Market turbulence tends to clusterClustering is widely applicable in many fields outside market, which make its applicationto markets even more usefulIt also resembles to Pareto Principle. In market context, price moves clusters. Big changes often come together in rapid succession, and then come long period of minorprice changes. Price movements do not follow well-mannered bell curve, they follow much violent curve that make investor’s ride bumpier and rewarding.
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4. Examples of ClusteringGeneral ContextClustering of Population
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7. 2) Natural Calamity Clustering The world's greatest earthquake belt, the circum-Pacific seismic belt, is found along the rim of the Pacific Ocean, where about 81 percent of the world's largest earthquakes occur. It has earned the nickname "Ring of Fire". The belt extends from Chile, northward along the South American coast through Central America, Mexico, the West Coast of the United States, and the southern part of Alaska, through the Aleutian Islands to Japan, the Philippine Islands, New Guinea, the island groups of the Southwest Pacific, and to New Zealand. Source - www2.usgs.gov
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9. 3) Clustering of Wealth
10. We can see similar example in form of wealth creation by Rakesh Jhunjhunwala, where in his top 3-4 holdings would account for 50%+ of his Portfolio. Few ideas would account for substantial part of his wealth creation.
11. 4) Clustering of natural resources
12. 5) Clustering of EmotionsWork life – Daily Schedule continues for months/years clustered by long vacation/break. Marriage Life – Physical love is much intense (clusters) during initial phase of marriage lifeGoals – Effort to achieve goal takes long time while feeling of achievement peaks (clusters) at attainment of goal and then tapers out.
13. Market ContextClustering of Volatility
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16. Clustering of Valuation
17. Clustering of Returns
18. Stocks ExampleSymphony was close to Rs 17-18 at the end of 2009. It first became 10x in Jan 2010-Oct 2012. Another 10x came in Sep 2013 – May 2015. Thus 100x returns came in 5.5 years of holding since 2000 (which is roughly 1/3 time)
19. Avanti Feeds was close to Rs 6-7 in Sep 2010. First 10x came by Feb 2014 (3.5 years). Another 10x came by Oct 2015 (1.5 years). Recently it doubled in 3 mths (Feb 2017-May 2017)Thus 100x happened effectively in 5 years.
20. Unitech went up 100x between 2006-2008 before giving up 95% of those gains during the 2008 crash. Thus rise and fall both were clustered.
21. Learning 1) Effort in terms of research for idea generation could be 80% while output could be 20%. While, only 20% of output could actually make money. Hence, investment process should be diligently followed (without frustration) and right allocation is key. 2) In terms of time and amount of information needed to research an idea. Many a times small amount of quality information/analysis determines the action on the idea. Incremental information and analysis can dilute the overall analysis. 3) Within portfolio few stocks will rise disproportionately. Hence right allocation is key to generate better returns. It's important to realize that things in life and markets are not evenly distributed.
22. 4) In terms of trading, timing becomes key if one believes in concept of clustering. Lower number of trades has higher probability to generate money. Since opportunity itself clusters. 5) Since returns are largely clustered followed by long periods of calmness or ranged move. Patience is extremely important. Beyond a point on a larger size compounding becomes very powerful machine. Longer survival ensures very high probability of making money. 6) Be on a lookout for any abnormal move, be it in terms of spike in margins, sudden spike in price move, significant capex, sharp rise in promoter holding, etc. Such clustering itself could throw up lots of ideas.