You are here: Home › The Valana Model: Model Validity
It is easy to provide many pages of reason and evidence to convince visitors to one's website that your process to identify winning stocks is properly tested, reliable and highly valid.
However, at the end of the day the only thing that counts is how well the stocks recommended and/or added to the funds or portfolios performed over an extended period.
It is almost impossible for a stock selection source to manipulate the outcomes or exaggerate the actual performance achieved, but only if the following four conditions apply:
Condition 1: the specific recommendation and price when recommended or added must be published or distributed to subscribers or members within one week of the recommendation made.
Condition 2: it must be possible to check the progress or movement of the stock or instrument recommended through the media or other available source.
Condition 3: the period of measurement must stretch over an extended period of at least four years to enhance the reliability factor of the predictions or instrument choices made.
Condition 4: the period should include several contrasting market conditions such as experienced between January 2006 and January 2010.
One cannot really assess the validity and reliability of a stock selection facility where the above four conditions are not applicable and it is important to know that the above period with its high volatility and market crash is probably the ideal period to test and assess the true merit of any fund, process or facility available.
With stock selection sources (stock pickers) it is also very useful if more than one method of performance evaluation can be used to illustrate the actual period performance of the stocks recommended and selected by those sources over an acceptable time frame.
Every six months new data and information usually becomes available and, therefore, when using Method 1 the ideal period to assess performance will be the six months immediately after the recommendation was made.
In the tables below we illustrate the two most effective methods of performance assessment.
Method 1 – Assessing the movements during the next six months of the stock as recommended each year by Penny Hot Shares, SA Investor, Prestige Bulletin and Valana.
In this illustration we applied the stop losses as chosen by these sources, but we ignored any dividends earned as we just wanted to see the moves during the six months.
One should, however, keep in mind that where a source often recommend stocks with low trade liquidity it will be very unlikely to maintain those desired stop losses if the market should go in a downward spiral such as happened during 2008.
Most stock selection sources recommend around 24 stocks each year and, therefore, in fairness we also show the moves obtained during the first six months of the stock of the 25 highest rated companies assessed by Valana each year during the above period.
Method 2 – As some stock may contain longer term value and benefits one should also illustrate all the trading actions and recommendations made by a stock selection source in the form of a portfolio. Here trading costs, interest earned in the script account and all dividends allocated should be included in the actual returns obtained.
In this method we also show the average performance of the 20 most popular general equity Unit Trust Funds where the dividend benefits are included in the returns obtained and we compare the performance of the JSE All Share Index and the Satrix 40 ETF with the other instruments assessed.
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