Author Topic: Don't Be Fooled  (Read 4500 times)

RussG

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Don't Be Fooled
« on: April 20, 2016, 02:22:29 PM »
Don't be fooled by the interest rate Prosper says you are earning when you log on to their web site. Compared to the way I do the math the numbers seem wildly inflated. Perhaps my analysis will, if not flawed, prove valuable to present and potential investors.

[Please note: Subsequent to my original post I discovered an error. I was looking at the wrong statements. I had them mixed up. Prosper, in it's not-so-infinite-wisdom does not put account numbers on their statements. Personally, I regard this as nothing short of over-the-top-idiocy. I have more than once confused statements from my Standard and Roth IRA accounts. In recalculating the numbers I came up with a marginally better interest rate of 2.37%]

As of January 31, 2015 the balances at my Prosper account were as follows:
Cash: $2,051.34
Notes: $21,436.19
Total Account Value: $23487.53
(My account had already been open for a long time so there was no matter of the initial cash deposit needing additional time to be fully invested.)

One year later, January 31, 2016, a year during which no deposits or withdrawals were made to or from the account, the balances were:
Cash: $1,237.54
Notes: $22,774.32
Total: $24,011.86

Over the course of 12 months my account grew in value by $524.33. Divide that amount by the account value at the beginning of that one year period to get this: .0223. Multiply .0223 by 100 to get the interest rate of 2.23%. This is simple interest. No fancy numbers manipulation to make things seem like something that they are not. This is an actual reflection of the growth of the account value over a one year period expressed as a percentage.

Logging onto my Prosper page today the company reports two interest rates: Seasoned Only Notes 10.19%, All Notes (current year) 9.94%. Yes, it is now a couple months past the end of the one year period for which Iím calculating interest, but as I recall the numbers reported by Prosper today arenít all that different than those reported during the 12 month period I have analyzed.

I have excluded from the Jan. 2016 account value (above) the amount of $316.34 that Prosper lists on my Jan. 2016 statement as Pending Payments. Prosperís definition of Pending Payment: ďA principal debit adjustment for payments that were initiated during the statement period and which are pending receipt for the next period.Ē Well, if the money ďainít been received it ainít been receivedĒ. Tagging onto my statement an amount I will be, or may be receiving during the next immediate month might be OK if itís done consistently, but since no such pending payments calculations were included by Prosper on statements until the beginning of 2016 it would skew the results for the purposes of this particular analysis which includes most of 2015.

Just for the heck of it, letís pretend that those pending funds had actually been deposited into my account. That would raise the interest earned on the account to 3.6%. Still a far cry from what it seems Prosper wants me to believe Iíve been earning.

One can complicate matters by thinking of the cash balance and the amount invested in notes as two separate things and to somehow make an effort to exclude cash from the interest rate-of-return calculation. To me, this is something of a red herring. I look at the lump sum I've turned over to Prosper as my investment, upon which the percentage rate of return should be compared to other investments. (Risk adjustment calculations are beyond my ken, so for me KISS is the motto.)

I do not do the note picking for my account myself. I let Prosper handle this for me. If I wanted to do it myself then perhaps Iíd earn more. Thatís not the point Iím making. Iím suggesting that the interest rates Prosper reports on individual investors web pages may, at least in some cases, be inflated--significantly.

It gets complicated trying to calculate interest rates when deposits and withdrawals are made during the period being analyzed. In the past Iíve used the Excel XIRR function to calculate rates for my Prosper and Lending Club accounts when I've made deposits or withdrawals. In those cases too, as I recall, both Lending Club and Prosper seem to wanted me to believe that I was earning more than what it seemed to me I really was.

To me, the particular analysis Iíve done here, that of simple interest over a 12 month period, where no deposits or withdrawals have been made is just as straight forward, simple, and factual as you can get. 2.23%. Admittedly, Iím a math dummy, so if Iím wrong somebody please show me how. G-d, I really want to be wrong!

Has anyone else performed a simple interest rate of return calculation for some period of time on an account that has had no deposits or withdrawals, and come up with either s similar or disparate result?

Can somebody tell me why I wouldn't be better off selling my notes and investing my money in an S&P 500 index fund? Alternatively, how much time would I need to spend doing the not picking for my account myself in order to quadruple the rate of return I'm getting now.
« Last Edit: April 21, 2016, 03:41:27 PM by RussG »

Rob L

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Re: Don't Be Fooled
« Reply #1 on: April 20, 2016, 05:59:33 PM »
My Prosper account has just come of age so to speak. Until very recently there have been too many moving parts to get a clear picture of the returns.
The account was opened 7/20/2014. I used Prosper's Quick Invest, A and B notes only with very simple filters.

It took 10 months for the initial investment to get fully invested in notes. Coincidentally 10 months of age and older is what Prosper calls seasoned notes.
So, at account age 20 months my entire initial investment became fully seasoned and I am now simply reinvesting cash each month.

My average overall note age is 347 days so charge offs as a percent of principal invested will probably continue to rise a bit for a while.
The average interest rate of my notes is 9.37% (contrasting my LC portfolio average of about 17.1%) very conservative.

Starting with last month and proceeding backwards by month my annualized returns have been:
3.50%, 3.57%, 1.08%, 5.80%, 2.09%, 5.86%, ... -> unseasoned months higher returns
Prosper reports my Seasoned Only returns to be 7.92% and All Notes returns to be 7.63%.

Going forward I expect my ROI to be around 3-4%. My expectation when I opened the account was 5-6%.
The Prosper numbers from my account web page are significantly higher and will remain so for quite a while.

FWIW the reason I even have a Prosper account in the first place is platform diversification.
If LC had a BRV I would have added the funds to my LC account rather than investing with Prosper.


bobeubanks

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Re: Don't Be Fooled
« Reply #2 on: April 20, 2016, 06:27:47 PM »
Prosper says mine is 10.84%. I did a very simple and pessimistic estimate of my return and got 7.0%. Since my estimate did things like assuming all my deposits were made and invested on day one and ignoring that I have been withdrawing all cash for 2 years, the real return would be higher. Perhaps not 10.84, but I bet it is pretty close.

My notes are ~75% AA, A, and B.

agd

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Re: Don't Be Fooled
« Reply #3 on: April 20, 2016, 09:12:21 PM »
Seems like you missed a $1k withdrawal somewhere.  Prosper's return calculation isn't perfect as it doesn't discount delinquent loans, cash drag, & uninvested funds, but it shouldn't be that far off for what you describe.  I've been investing for close to 3.5 years.  Multiple 6 figure accounts with average loan inception age between 6 and 29 months.   I have calculated returns directly from the monthly payment extracts & NSRplatform.com and get returns very similar to Prosper's calculation (+/- .50%).   

Could you set up your account on NSR and see what they calculate?

RussG

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Re: Don't Be Fooled
« Reply #4 on: April 21, 2016, 01:55:29 PM »
Seems like you missed a $1k withdrawal somewhere.  Prosper's return calculation isn't perfect as it doesn't discount delinquent loans, cash drag, & uninvested funds, but it shouldn't be that far off for what you describe.  I've been investing for close to 3.5 years.  Multiple 6 figure accounts with average loan inception age between 6 and 29 months.   I have calculated returns directly from the monthly payment extracts & NSRplatform.com and get returns very similar to Prosper's calculation (+/- .50%).   

Could you set up your account on NSR and see what they calculate?

I wish I had missed a withdrawal. I just checked my statements again. I don't think I missed anything--withdrawals or deposits. I don't think I've ever made any withdrawals from this account which I opened in 2013.

I looked at the link you provided and didn't understand what I was looking at. There was no information I could find about how the site works. I chatted with a rep and asked about a tutorial--none available. Besides, the simple interest calculation I used is about as simple as anything can be. I don't think an outside service is warranted.

I don't see any reason for complicating things by looking at seasoned or unseasoned notes, delinquent loans, invested funds, etc. No. All that needs to be considered, IMHO, is the account value at the beginning of the period and its value as the end. That represents the actual gains or losses. Period. That's the number to use when comparing investments as far as I'm concerned.

I think I can do better elsewhere and will focus my attention on getting out of this investment.

Fred93

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Re: Don't Be Fooled
« Reply #5 on: April 21, 2016, 02:47:34 PM »
I don't see any reason for complicating things by looking at seasoned or unseasoned notes, delinquent loans, invested funds, etc. No. All that needs to be considered, IMHO, is the account value at the beginning of the period and its value as the end. That represents the actual gains or losses. Period. That's the number to use when comparing investments as far as I'm concerned.

I agree.

However, I think it is worthwhile to attempt to diagnose how this low return result came about.  Toward that end, the monthly statements do contain some useful numbers.  Specifically, interest received, and chargeoffs.  Presuming no deposits or withdrawals, the change in value of your total account should be the interest received minus chargeoffs. 

Interest received should be about the same every month.  That's simple to check.  Chargeoffs should be substantially lower than interest received.

Is the low return you describe due to an accounting error of some sort?  ... or lots of chargeoffs?  ...or what?

What grades of loans have you invested in?  (I'm just curious.)

RussG

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Re: Don't Be Fooled
« Reply #6 on: April 21, 2016, 03:42:34 PM »
Please note: Subsequent to my original post I discovered an error. I was looking at the wrong statements. I had them mixed up. Prosper, in it's not-so-infinite-wisdom does not put account numbers on their statements. Personally, I regard this as nothing short of over-the-top-idiocy. I have more than once confused statements from my Standard and Roth IRA accounts. In recalculating the numbers I came up with a marginally better interest rate of 2.37%.

Rob L

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Re: Don't Be Fooled
« Reply #7 on: July 31, 2016, 04:41:04 PM »
Prosper reports my "Annualized Return" as 7.68% seasoned only and 7.43% all notes. Wish it were so.

This month marks my second anniversary as a Prosper investor.
I made one initial cash deposit two years ago and have continuously re-invested all payments received.
The account value is up by 9.55% over those 24 months. That's 4.8% annualized simple interest or 4.55% compounded monthly.

Charge offs the past two months have been awful. Even took a net loss one month.
However, looking at my web site today it appears that I'll have a 0.40% profit this month (it's the last day of July).

Here's a couple of interesting graphs of my Prosper account performance:



                                   


For comparison here's my LENDING CLUB charge offs graph.
Seems strange that the so-called "less risky" A & B Prosper loans are charging off at or above the rate of my "more risky" Lending Club D & E loans.
My Prosper "Average Note Yield at Acquisition" is 9.27%. My LC "Weighted Average Interest Rate" is 17.24%.
Pretty good reason for my LC returns to be roughly twice my Prosper returns.  :o





Eamonnca1

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Re: Don't Be Fooled
« Reply #8 on: May 03, 2017, 05:00:54 PM »
Hi, I'm new here, just came as a result of a Google search. I've been doing Prosper for about ten years or more. They were consistently reporting an annualized return of over 10% for my account. Today I got an email saying there was a status update. I logged in and found this message (which I've screenshotted for posterity):

Quote
Important Account Update
It recently came to our attention that the annualized net return numbers displayed on your account overview page were inaccurate due to a system error. This error only affected the Annualized Net Return and Seasoned Annualized Net Return numbers and has now been fixed.

This error did not impact any other part of your account, including payments, deposits, monthly statements, tax documents, and note and loan level information - including estimated returns.

We sincerely apologize for this error. If you have any questions, please email us at investorquestions@prosper.com.

My annualized return has now plunged to 8.18%. If I'd known that was the actual rate I might have been a bit more reticent about making weekly cash transfers into my account. I smell a class-action lawsuit coming on here.

Rob L

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Re: Don't Be Fooled
« Reply #9 on: May 03, 2017, 05:50:02 PM »
I got the email too. Their returns were always out of whack with what I calculated (when I bothered).
Since Prosper discontinued participation in Folio I stopped reinvesting and have been waiting for "the end".

Meanwhile, look at this:


Their "neatsy/keano" bar chart says I have 28% cash. Well, actually it's $24,765.85 / $55,367.38 = 44.7%, isn't it?
Maybe I've missed something here. Seems like a very simple and straight forward calculation.
And by the way, I have zero AA loans not 1%. Never bought one; none in my portfolio. I just checked.

Eons ago when I was in undergrad school I had a calculus professor that began and ended a lecture demonstrating the solution to a single problem. He was furiously writing on the board and erasing as he went. In the end his result was so wrong we all knew it (yeah, even a bunch of dumb under grads). There was giggling and choked back laughter in the peanut gallery and the professor was furious. He turned to the class and angrily said "You think I'm wrong .....hyuioyuohjhjl...... show me where I'm wrong". Luckily class was over and as I remember we all shuffled out without another peep.

So, I could be wrong here. If you think I'm wrong, show me where I'm wrong. :)