Author Topic: Why I will never invest a dollar in lending club...  (Read 6411 times)

milesdividendmd

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Why I will never invest a dollar in lending club...
« on: May 14, 2014, 11:51:59 PM »
I've noticed a fair bit of interest in peer to peer lending in these parts.

I am convinced that Lending Club and Prosper are really poor investments for a number of reasons, many of which I wrote about tonight:

[MOD EDIT: Link removed.  See final post in this thread.]

What say you?  Are you investing in this niche?  And if so Why?

Alexi
« Last Edit: May 20, 2014, 07:25:54 PM by arebelspy »

innerscorecard

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Re: Why I will never invest a dollar in lending club...
« Reply #1 on: May 15, 2014, 12:10:45 AM »
I agree and have often said so for a very fundamental reason. The US capital markets are historically the best long-term investment for very good reasons, not just for arbitrary reasons (regulations that protect investors, relatively efficient markets making sure securities are priced fairly, etc.). To deviate from them I need a very good reason or competitive advantage, such as knowing that a market is mispriced or inefficient (such as investing in a local business or a business I start). With websites like Lending Club you get all the downsides of having a public market (relatively low returns) with non of the benefits (investing in regulated companies).

innerscorecard

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Re: Why I will never invest a dollar in lending club...
« Reply #2 on: May 15, 2014, 12:13:06 AM »
And I'll add that as Buffett says, due to the daily price quotations, most people in the population (even educated people) trust the public markets less than other investments where there are no daily price quotations. This liquidity should theoretically only be a blessing but people see it as a curse. So they turn to things like Lending Club. I get why, but I will never invest myself.

milesdividendmd

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Re: Why I will never invest a dollar in lending club...
« Reply #3 on: May 15, 2014, 12:29:08 AM »
That's an interesting point about the psychological stress of daily price quotations. On one hand it's intuitive, on the other hand our human aversion to this awareness of market value seems not unlike the child who closes his eyes and imagines that others can't see him.

Argyle

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Re: Why I will never invest a dollar in lending club...
« Reply #4 on: May 15, 2014, 12:29:45 AM »
Very interesting.  The thing that makes me steer clear of Lending Club is the possibility of the whole enterprise going belly-up at some point.  I mean if Lending Club shut up shop, what recourse does anyone have?  And my hunch is that sooner or later it's going to happen.

innerscorecard

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Re: Why I will never invest a dollar in lending club...
« Reply #5 on: May 15, 2014, 12:56:28 AM »
That's an interesting point about the psychological stress of daily price quotations. On one hand it's intuitive, on the other hand our human aversion to this awareness of market value seems not unlike the child who closes his eyes and imagines that others can't see him.

By the way, I am really enjoying your blog (the first time I ever saw it was with this forum link, so I guess it was self-promotion, but self-promotion that added value!). I really like how you apply investing principles to personal finance and vice versa in a way that feels very natural, for example in your posts on churning.

milesdividendmd

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Re: Why I will never invest a dollar in lending club...
« Reply #6 on: May 15, 2014, 10:27:03 AM »
That's an interesting point about the psychological stress of daily price quotations. On one hand it's intuitive, on the other hand our human aversion to this awareness of market value seems not unlike the child who closes his eyes and imagines that others can't see him.

By the way, I am really enjoying your blog (the first time I ever saw it was with this forum link, so I guess it was self-promotion, but self-promotion that added value!). I really like how you apply investing principles to personal finance and vice versa in a way that feels very natural, for example in your posts on churning.

Innerscorecard,

Thanks!  I love writing the blog, and am always thrilled (and surprised) to hear that others like to read it.

The self promotion thing is a sticky wicket. On one hand I try to only share links (mine and others) pertinent to the topic at hand. And in my defense, the blog is not monetized at this point, though I am considering it.

On the other hand, it is impossible to deny that I am biased in these assessments as it is in my interests to have as many people read and comment on the blog as possible.

In any case knowing that you derive value from my writing means an awful lot to me.

Alexi

AmericanEagle

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Re: Why I will never invest a dollar in lending club...
« Reply #7 on: May 20, 2014, 01:22:55 PM »
You have an interesting argument, that a high-yield bond fund offers a better overall return, lower fees, higher liquidity, and lower risk than Lending Club. 

Some points:

1. High-yield bond funds themselves offer a highly variable returns.  Lending Club returns are less variable, year over year within the same grade.  Granted, this may change, we don't have that many years' data with lending club.

2. Lending club returns capital back to you each month.  Depending on one's objectives, this may be an advantage, or not.

3. High-yield bond funds invest in corporate junk bonds.  Lending club invests in consumer debt.  Different birds.

4. Lending club offers a lot of options to invest in exactly the type of loan you want and to review historical data.  If one is so inclined, a bit of researh can boost returns.

Now the disadvantages of lending club:

1. It is slow.  You can just dump $10,000 into a bond fund and be done with it.  You can send $10,000 to lending club, but it's going to be a couple of weeks or more before it gets all invested and the loans are funded.  There's a bit more work involved, even with "automated" investments.

2) To a certain extent, waiting for loans to fund decreases annual returns.

3. There is a secondary market for loans, however, it charges another 1% fee to sell a loan.

foobar

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Re: Why I will never invest a dollar in lending club...
« Reply #8 on: May 20, 2014, 02:13:00 PM »
I don't think lendingclub going bankrupt up is a major risk. They have some text about what happens and it isn't great but also not the end of the world.

It is hard to figure out how variable lendingclub returns will be. Sure the yield being offered is the same but the question is how does the default rate change in various economic environments.

I had decent returns (~11%) over the 2 years I did it. I am bailing on it because it is too much work. It was fun for the first couple of months but after that it got tedious. Part of that is I wasn't comfortable putting large sums into 1 loan (i.e. I didn't want to put 1k into a 10k loan. I wanted to invest 100 in 10 loans). You might be able to automate that but I decide I was out. That also exposed the fact that their secondary market is pretty weak. I was discounting decent loans (i.e. the person had paid for the past 9 months, no credit score change) at 10% discounts and getting no buyers for about 3 months.




You have an interesting argument, that a high-yield bond fund offers a better overall return, lower fees, higher liquidity, and lower risk than Lending Club. 

Some points:

1. High-yield bond funds themselves offer a highly variable returns.  Lending Club returns are less variable, year over year within the same grade.  Granted, this may change, we don't have that many years' data with lending club.

2. Lending club returns capital back to you each month.  Depending on one's objectives, this may be an advantage, or not.

3. High-yield bond funds invest in corporate junk bonds.  Lending club invests in consumer debt.  Different birds.

4. Lending club offers a lot of options to invest in exactly the type of loan you want and to review historical data.  If one is so inclined, a bit of researh can boost returns.

Now the disadvantages of lending club:

1. It is slow.  You can just dump $10,000 into a bond fund and be done with it.  You can send $10,000 to lending club, but it's going to be a couple of weeks or more before it gets all invested and the loans are funded.  There's a bit more work involved, even with "automated" investments.

2) To a certain extent, waiting for loans to fund decreases annual returns.

3. There is a secondary market for loans, however, it charges another 1% fee to sell a loan.

Mr. FI

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Re: Why I will never invest a dollar in lending club...
« Reply #9 on: May 20, 2014, 02:22:09 PM »
I invest at Prosper and not LC, but so far so good. I will mention this:

Quote
We charge investors one percent (1%) of all loan payments. This service charge is designed to cover our costs for servicing loans, making Note payments and maintaining investor accounts. The 1% service charge impacts investors’ annual returns by less than 1% because it is not an annual charge. The average impact of the 1% service charge on the annual returns of a 36-month Note is 0.72%, while the average impact on the annual returns of a 60-month Note is 0.41%.

So the fee drag is not so severe. It is true that these investments are illiquid, however I don't think anyone should be investing in this platform if they need the money in under 5 years. This is a small part of my investment portfolio and is an interesting way to diversify.

Cheers!

milesdividendmd

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Re: Why I will never invest a dollar in lending club...
« Reply #10 on: May 20, 2014, 02:39:04 PM »
That's an interesting argument from lending club, but I'm not sure I buy it.

If I understand The argument, they're saying that as time goes on your expense ratio goes down relative to the original loan, because the amount of the loan outstanding is smaller. This is reflected in the claim that the longer the loan is, the lower the amount is that is lost to expense ratio.

The problem with this logic, is that either you do not reinvest the money that you get back, in which case all of the money that is not incurring fees is also not benefiting from interest payments (and is losing money to inflation.) Alternatively if you do reinvest the money in lending club loans, you are once again paying 1% fees on all of your money (or more as the principal of your loan amount has gone up if you've made a profit.)

This is just my initial impression, and I could be wrong. What do you think?

Alexi


tooqk4u22

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Re: Why I will never invest a dollar in lending club...
« Reply #11 on: May 20, 2014, 02:53:31 PM »
It is hard to figure out how variable lendingclub returns will be. Sure the yield being offered is the same but the question is how does the default rate change in various economic environments.

This.  We have been in a "rising tide enviroment" for most of LCs existinence (at least as long as its had any real size). The historical data doesn't reflect when the tide goes out.  Other consumer loan institutions (credit cards, autos, furniture, etc.) for example have decades of data through many economic cycles.

The other risk is increased regulatory risk  - as the platform/company grows it will begin to get impaled by the various regulatory agencies that claim to protect consumers/investors.


milesdividendmd

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Re: Why I will never invest a dollar in lending club...
« Reply #12 on: May 20, 2014, 03:03:39 PM »
I completely agree with your first point. Intuitively it seems that lending club is an extremely junky junk-bond and will have extreme equity like risks during the next downturn.

Your point about regulatory risk is an excellent one. I hadn't thought of that. But it is valid.

Perhaps I should invest in an 11 foot pole.

Alexi

It is hard to figure out how variable lendingclub returns will be. Sure the yield being offered is the same but the question is how does the default rate change in various economic environments.

This.  We have been in a "rising tide enviroment" for most of LCs existinence (at least as long as its had any real size). The historical data doesn't reflect when the tide goes out.  Other consumer loan institutions (credit cards, autos, furniture, etc.) for example have decades of data through many economic cycles.

The other risk is increased regulatory risk  - as the platform/company grows it will begin to get impaled by the various regulatory agencies that claim to protect consumers/investors.

Mr. FI

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Re: Why I will never invest a dollar in lending club...
« Reply #13 on: May 20, 2014, 03:19:29 PM »
That's an interesting argument from lending club, but I'm not sure I buy it.

If I understand The argument, they're saying that as time goes on your expense ratio goes down relative to the original loan, because the amount of the loan outstanding is smaller. This is reflected in the claim that the longer the loan is, the lower the amount is that is lost to expense ratio.

The problem with this logic, is that either you do not reinvest the money that you get back, in which case all of the money that is not incurring fees is also not benefiting from interest payments (and is losing money to inflation.) Alternatively if you do reinvest the money in lending club loans, you are once again paying 1% fees on all of your money (or more as the principal of your loan amount has gone up if you've made a profit.)

This is just my initial impression, and I could be wrong. What do you think?

Alexi

Here's where I got that information: http://www.lendacademy.com/an-in-depth-look-at-investor-service-fees

It's certainly not perfect. That's why I have only a small portion of my portfolio here, but I wanted to see if I could get double digit returns consistently while understand the long term risks.

arebelspy

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Re: Why I will never invest a dollar in lending club...
« Reply #14 on: May 20, 2014, 07:25:30 PM »
The self promotion thing is a sticky wicket. On one hand I try to only share links (mine and others) pertinent to the topic at hand. And in my defense, the blog is not monetized at this point, though I am considering it.

Mod Note: Sharing a relevant link to a topic at hand is fine.  Starting a new topic to promote a blog post is not.

This post is an example of the latter.  There are plenty of Lending Club threads you could have added value to, instead of starting your own thread with very little commentary in it, just a link.

It doesn't matter if your blog is monetized or not.

Thread locked.

PM if you have any questions.

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