Author Topic: New to LC - Need advice on deploying 250k  (Read 20472 times)

hoggy1

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Re: New to LC - Need advice on deploying 250k
« Reply #45 on: September 13, 2014, 12:00:26 AM »
Thanks for the link Fred, but yes I know what an accredited investor is and I am one on multiple counts.

I have learned a lot from this forum but have not journeyed back in the archives past the spring of this year. And I have read 10ks before but have not read LCs 10k exhaustively. This is a worthwhile endeavor?
Steve

Fred

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Re: New to LC - Need advice on deploying 250k
« Reply #46 on: September 13, 2014, 02:46:05 AM »
And I have read 10ks before but have not read LCs 10k exhaustively. This is a worthwhile endeavor?

I have been reading every page of every LC 10-Ks (annual), but not the 10-Qs (quarterly).

Companies like LC meticulously worded their SEC filings, trying to provide transparency while not spilling the secret sauce.  IMO, whatever they said to SEC is more "binding" than what they said anywhere else, including on their website.

hoggy1

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Re: New to LC - Need advice on deploying 250k
« Reply #47 on: September 13, 2014, 09:28:11 AM »
IMO, whatever they said to SEC is more "binding" than what they said anywhere else, including on their website.

I agree with that and think it is pertinent to this IRA folio selling. I had self directed IRAs for many years which allowed purchases and sales of stock and bonds and assets like these notes, so my thinking is LC's "rule" prohibiting IRA sales is not to comply with any law (if it had been law they would have shut it down indeed) but instead to help them strengthen some argument regarding risk in their SEC filings.
Steve

Rob L

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Re: New to LC - Need advice on deploying 250k
« Reply #48 on: September 13, 2014, 10:39:05 AM »
Indeed. There's also little evidence that diversifying in 10,000 loans is much safer than in 'only' 1,000. Our back-testing shows that the average return curves flatten quickly, see https://lendingrobot.com/#/resources/charts#diversify.

Isn't the number of notes required for sufficient diversification a function of the variance of the loan returns?
An investor with a portfolio containing only A, B & C's would need fewer loans for the purpose of diversification than one holding a portfolio of only D, E &F's; correct?
If this is true (and it may not be) then are the number of loans in each case substantially different, or does it really not matter much?
Just wondering what 7 graphs (one per credit grade A - G), similar to your composite of all loans (A - G), would look like.

brycemason

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Re: New to LC - Need advice on deploying 250k
« Reply #49 on: September 13, 2014, 01:04:55 PM »
Rob, go back a few pages and use my formula to simulate how the variance declines by p. Just assume 0.08 for A, and +0.02 for each subsequent loan grade. Your intuition is correct.

Rob L

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Re: New to LC - Need advice on deploying 250k
« Reply #50 on: September 13, 2014, 01:20:14 PM »
Thanks, I'll do that.

Rob L

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Re: New to LC - Need advice on deploying 250k
« Reply #51 on: September 13, 2014, 05:38:05 PM »
I agree with that and think it is pertinent to this IRA folio selling. I had self directed IRAs for many years which allowed purchases and sales of stock and bonds and assets like these notes, so my thinking is LC's "rule" prohibiting IRA sales is not to comply with any law (if it had been law they would have shut it down indeed) but instead to help them strengthen some argument regarding risk in their SEC filings.

Why do we have to guess on a matter of such importance to so many?
After almost a year now would it be too much to ask of LC that they clarify the matter for us all?

core

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Re: New to LC - Need advice on deploying 250k
« Reply #52 on: September 13, 2014, 09:35:49 PM »
After almost a year now would it be too much to ask of LC that they clarify the matter for us all?

Whatever issue/incident caused the notice to be posted in the first place is likely also the reason they cannot clarify the matter without putting themselves in an even more precarious position and causing alarm.

Now if I may put my normal tinfoil hat on:  Me, I think the executives are waiting for the statute of limitations to run out.  They posted the notice a year ago, so if they can just make it a little while longer without everything blowing up, they will be safe.  Or alternative explanation:  They just need to make it past the IPO and then why would it matter.

BruiserB

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New to LC - Need advice on deploying 250k
« Reply #53 on: September 13, 2014, 11:25:54 PM »
As of now it seems to be an unenforced rule.  They enabled Folio trading on my IRA even while having this rule in effect. Seems the main reason for it would be to prevent you from buying/selling loans to yourself or someone you are in collusion with at non arms length prices.  One could hypothetically move losses out of an IRA so you can deduct them and gains into an IRA to make them tax deferred.

I haven't made any Folio trades even though I have access to it. I can't imagine there would be any problem if you used it to liquidate an account at market prices to unrelated investors or even traded regularly as long as you don't do anything fishy.


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Rob L

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Re: New to LC - Need advice on deploying 250k
« Reply #54 on: September 14, 2014, 05:33:19 PM »
An individual loan charges off with a probability of approximately 0.2 and you can treat a portfolio of N loans as a binomial random variable. The expected number of charge-offs will be 0.2*N. The standard deviation in the charge-offs of your portfolio will be SQRT( N*0.2*0.8 ) . So, the mean number of bad loans grows linearly with your portfolio, but the standard deviation will only grow with the square root of N. As your portfolio grows you will get more predictable numbers of charge-offs.

In terms of charge-off rates, a random sample of N loans will be expected to (95% of the time) to have a mean charge-off rate between:

N: CI
25: (4%, 36%)
50: (9%, 31%)
100: (12%, 28%)
200: (14%, 26%)
400: (16%, 24%)
800: (17%, 23%)

If you feel your strategy can eliminate some of the bad loan choices, you may need fewer loans in your portfolio to overcome the variance. For what it's worth. Once you get above 1000 loans the benefit of diversifications really drops.

The benefits of diversification above 800 notes are shown below:



The table at the top of the graphic provides data for all completed LC loans (courtesy of NSR). Avgerage interest rate and ROI are shown for informational purposes only and were not used to generate the graph.

The data from Bryce's post shows two sigma confidence intervals for a 20% average default rate (approximately Grade D loans) where the number of notes varies from 25 to 800. In the case of 800 notes the lower and upper two sigma confidence intervals are 17.2% and 22.8% respectively (5.6% apart). Taking Bryce's table a bit further:

N: CI
800: (17.2%, 22.8%)
1250: (17.7%, 22.3%)
2500: (18.4%, 21.6%)
5000: (18.9%, 21.1%)

At 5000 notes the CI's are only 2.2% apart; an improvement of 5.6% - 2.2% = 3.4%. The coloured graph above shows this improvement beyond 800 notes for each loan grade as a function of the number of notes starting at 1250. Obviously improvements per note added continue to fall per the sqrt of deviation but seem to me to be significant. If you think you have a great set of filters or a great model you might want to ask yourself it's edge will overcome bad luck if too few notes are purchased. Guess I don't believe in over diversification, but there are practical limitations as to how many loans one can buy directly from the retail platform. The 2pm PT release just came and went with only 8 D&E loans combined. It is Sunday afternoon.

Bryce & Fred; where's the party?

lascott

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Re: New to LC - Need advice on deploying 250k
« Reply #55 on: September 14, 2014, 06:07:37 PM »
Taking Bryce's table a bit further

Thanks guys. I just cut-n-pasted those to see them all together.

« Last Edit: September 14, 2014, 07:03:18 PM by lascott »
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ThinleyWangchuk

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Re: New to LC - Need advice on deploying 250k
« Reply #56 on: September 16, 2014, 02:48:25 AM »
Hi Nathan,
Warren Buffett once said, “diversification is protection against ignorance, it makes little sense for those who know what they’re doing.”
The most important thing you can do is not over-diversify.  The image attached shows that after a basket of 25 securities the value added "for the sake of diversification" is minimal. 
« Last Edit: September 16, 2014, 02:55:38 AM by DonDaVinci »

rawraw

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Re: New to LC - Need advice on deploying 250k
« Reply #57 on: September 16, 2014, 07:29:02 AM »
Hi Nathan,
Warren Buffett once said, “diversification is protection against ignorance, it makes little sense for those who know what they’re doing.”
The most important thing you can do is not over-diversify.  The image attached shows that after a basket of 25 securities the value added "for the sake of diversification" is minimal.
Comparing diversification of stocks to homogenous credit makes no sense to me