Author Topic: LC ANAR is nonsense, how should I value my portfolio  (Read 15902 times)

rj2

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LC ANAR is nonsense, how should I value my portfolio
« on: February 24, 2016, 07:30:15 PM »

LC's ANAR is based on "loss assumptions" which are clearly wrong.

The use the following "9 month loss estimates", which you can supposedly tweak:

Current - 0%
In Grace Period - 28%
Late 16-30 - 59%
Late 31-120 - 76%
Default - 90%

What's clearly wrong here is the first line--the historical rate of charge off for loans that are current is NOT zero. That skews the whole result. There is no way to tweak that in their online tool to a non-zero number. You can tweak the loss estimate for loans that are in grace period, or late, or in default. But you cannot tweak the loss assumption for current loans to a sensible value.

The second questionable thing here is "9 months". Loans are either 36 or 60 months, not 9 months, and what you care about is the final disposition of the loan, not where it will be part-way through.

As a result, their quoted ANAR number is a fiction that should not be taken seriously.

Anyone have a better way to estimate the value of a portfolio?


nonattender

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Re: LC ANAR is nonsense, how should I value my portfolio
« Reply #1 on: February 24, 2016, 07:46:30 PM »
Half the posts in this forum are about portfolio valuation.  Look around.  There's a search box at the top of your screen, if the long-running
posts about this very topic, with tens of thousands of views, which are pretty much always in the top 2-3 posts in this section, do not help.
A little nonsense now and then is relished by the wisest men.

lascott

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Re: LC ANAR is nonsense, how should I value my portfolio
« Reply #2 on: February 24, 2016, 09:46:35 PM »
Anyone have a better way to estimate the value of a portfolio?
XIRR is common.
Tools I use: (main) BlueVestment: https://www.bluevestment.com/app/pricing + https://www.interestradar.com/ , (others) Lending Robot referral link: https://www.lendingrobot.com/ref/scott473/  & Peercube referral code: DFVA9Y

AnilG

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Re: LC ANAR is nonsense, how should I value my portfolio
« Reply #3 on: February 24, 2016, 10:01:35 PM »
As a result, their quoted ANAR number is a fiction that should not be taken seriously.

Anyone have a better way to estimate the value of a portfolio?

Are you looking a better way to estimate the VALUE of a portfolio or RETURN of a portfolio?

Value represents present snapshot of your portfolio, Return represents past history of your portfolio, and Expected Return represents future expectations of your portfolio. Present: Value, Past: Return, Future: Expected Return.

Don't expect to come up with one measure to give you past, present and future of your portfolio. Find the appropriate measure for what you are trying to measure.

BTW, consumer lending has been around for 100+ years, so if you want to know more, read about consumer lending from lenders' perspective and talk to professionals working in this area.
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Fred

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Re: LC ANAR is nonsense, how should I value my portfolio
« Reply #4 on: February 25, 2016, 01:57:52 AM »
What's clearly wrong here is the first line--the historical rate of charge off for loans that are current is NOT zero. That skews the whole result. There is no way to tweak that in their online tool to a non-zero number. You can tweak the loss estimate for loans that are in grace period, or late, or in default. But you cannot tweak the loss assumption for current loans to a sensible value.

You can, if you use the formula rather than the tool:


rj2

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Re: LC ANAR is nonsense, how should I value my portfolio
« Reply #5 on: February 25, 2016, 11:05:37 AM »

Are you looking a better way to estimate the VALUE of a portfolio or RETURN of a portfolio?

Both. In order to calculate return you must first calculate value. In order to calculate value you need to adjust for expected charge offs. You certainly can't assume that every loan that is current is going to stay that way, as the LC data does.

Without running through every loan in your portfolio and looking at its remaining months and current credit score you can't just do simple math either.

I looked at other recent threads to see if anybody had a solution and haven't seen one posted here.

For example, how are people valuing a note in their portfolio which has always been current, has 14 months left to go, and has seen a significant decline in recent credit score?

Or even approximating a value in aggregate?
« Last Edit: February 25, 2016, 11:09:32 AM by rj2 »

lascott

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Re: LC ANAR is nonsense, how should I value my portfolio
« Reply #6 on: February 25, 2016, 11:45:59 AM »
For example, how are people valuing a note in their portfolio which has always been current, has 14 months left to go, and has seen a significant decline in recent credit score?
Or even approximating a value in aggregate?
If you have a large enough number of notes and have been investing for over 1.5 years then the above doesn't matter.  It is statistically insignificant in the return.  The above note will be adjusted for when/if it goes to grace or other late status. 

Re: long time payer but then credit drops
How are you going to predicate a divorce, job loss, non-fault car accident, tornado destroying their property, etc, etc?

You could just use the LC formula Fred pointed you to and use 5% or 10% for 'current'. Certainly 'current' is indirectly factored into the %s for 'grace' and other late status. LC has adjusted those %s over time as they've gained data to back them.

I use XIRR.  As well I use 25%, 100%, 100%, and 100% in my custom adjustments. It is conservative and I like that.  https://www.lendingclub.com/account/investorReturnsAdjustments.action

Tools I use: (main) BlueVestment: https://www.bluevestment.com/app/pricing + https://www.interestradar.com/ , (others) Lending Robot referral link: https://www.lendingrobot.com/ref/scott473/  & Peercube referral code: DFVA9Y

lascott

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AnilG

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Re: LC ANAR is nonsense, how should I value my portfolio
« Reply #8 on: February 25, 2016, 11:54:16 AM »
Return is past performance of the portfolio. It has nothing to do with what may happen to the portfolio today or in the future. And the portfolio value is the value of the portfolio today without any adjustments. The past performance of your portfolio is the gain in your portfolio in the past, i.e. (value of portfolio today - original investment) / original investment. NAR and IRR give you the past performance (return) of the portfolio.

Quote
In order to calculate value you need to adjust for expected charge offs.

If you are trying to calculate return, i.e. past performance of the portfolio, why would you worry about future expected charge offs? Future has no impact on what happened in the past. The value of the portfolio today is the value of the portfolio without any adjustments.

If you want to estimate "intrinsic" or "fair market" value of your portfolio today, then you need to make some adjustments. As you are dealing with present, you need to find shortest period of past that is more likely to be similar to present and more likely to be similar to shortest period in the future. With lifecycle of loans from cradle to grave and having sufficient data for this lifecycle, that shortest time period is about 9 months, thus the use of 9 month loss estimates in determining "intrinsic" or "fair market" value of the portfolio. You are not going to get representative loss estimates of today's environment  by using loss estimates in last 5 years. Economic and other external environmental factors  change lot more in 5 years than in 9 months.

Quote
how are people valuing a note in their portfolio which has always been current, has 14 months left to go, and has seen a significant decline in recent credit score?

You find the similar loans in the past population and their outcome and use that data to determine expected value of your note.


Are you looking a better way to estimate the VALUE of a portfolio or RETURN of a portfolio?

Both. In order to calculate return you must first calculate value. In order to calculate value you need to adjust for expected charge offs. You certainly can't assume that every loan that is current is going to stay that way, as the LC data does.

Without running through every loan in your portfolio and looking at its remaining months and current credit score you can't just do simple math either.

I looked at other recent threads to see if anybody had a solution and haven't seen one posted here.

For example, how are people valuing a note in their portfolio which has always been current, has 14 months left to go, and has seen a significant decline in recent credit score?

Or even approximating a value in aggregate?
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nonattender

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Re: LC ANAR is nonsense, how should I value my portfolio
« Reply #9 on: February 25, 2016, 12:26:31 PM »
Are you looking a better way to estimate the VALUE of a portfolio or RETURN of a portfolio?

Both.

https://en.wikipedia.org/wiki/Uncertainty_principle

Gonna have to learn that probability is all you get! :)

The platforms do their best to "collapse" certain observables into pretty pictures using decent assumptions, but it's not a guarantee.

We're really not trying to hide anything behind "non-simple" math, but the nature of the investment is one that requires some really
deep calculation, can be approached from a variety of angles, and there isn't really one "right" way to do it; it's situation-dependent.
A little nonsense now and then is relished by the wisest men.

Fudgenut

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Re: LC ANAR is nonsense, how should I value my portfolio
« Reply #10 on: February 25, 2016, 01:30:35 PM »
I think what the OP is asking for is the current fair market value of a note.  This is not something that can easily be calculated.  If you find a way to accurately determine this, you should be able to make a killing on the secondary market.  However, there is a secondary market (folio) that we could potentially use to determine this.  Perhaps you could write a script to check if there are any notes from the same loan available for sale on the secondary market.  Take the lowest one posted, subtract the 1% fee, maybe subtract a little more (because the actual fair-market value is lower than the lowest available, as the lowest available didn't actually sell).  That should roughly give you the fair market value of a note.



AnilG

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Re: LC ANAR is nonsense, how should I value my portfolio
« Reply #11 on: February 25, 2016, 02:04:32 PM »
Actually, we at PeerCube for our Pro Plan subscribers, do the bolded item below that you are asking for. The loan details page lists all the currently listed notes from same loan on the secondary market. Not only that we also provide the ability to see all notes from a loan ever listed on secondary market (as detected by PeerCube). In addition, if you decide to sell a note using PeerCube on secondary market, the system will give you different suggested selling prices based on currently listed notes from same loan or listed notes from similar loans.

For example relevant screen captures for Loan ID 21480538 https://www.peercube.com/comment?loanid=21480538

I think what the OP is asking for is the current fair market value of a note.  This is not something that can easily be calculated.  If you find a way to accurately determine this, you should be able to make a killing on the secondary market.  However, there is a secondary market (folio) that we could potentially use to determine this.  Perhaps you could write a script to check if there are any notes from the same loan available for sale on the secondary market.  Take the lowest one posted, subtract the 1% fee, maybe subtract a little more (because the actual fair-market value is lower than the lowest available, as the lowest available didn't actually sell).  That should roughly give you the fair market value of a note.
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Rob L

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Re: LC ANAR is nonsense, how should I value my portfolio
« Reply #12 on: February 25, 2016, 02:05:10 PM »
However, there is a secondary market (folio) that we could potentially use to determine this.

That's a really good idea.
If the LC secondary market is sufficiently competitive it should serve as a pretty good price discovery mechanism. I mean that's what they do. Whether the LC secondary market has matured to that level though I dunno. I've never traded folio and will leave that up to the experts.

As for Prosper this Podcast of two years ago may be of interest regarding that secondary market.
http://www.lendacademy.com/one-of-prospers-largest-individual-investors/

kbenson99

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Re: LC ANAR is nonsense, how should I value my portfolio
« Reply #13 on: February 25, 2016, 02:31:36 PM »
Are the notes from the Folio secondary market still updated to PeerCube every 2 hours?

AnilG

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Re: LC ANAR is nonsense, how should I value my portfolio
« Reply #14 on: February 25, 2016, 02:40:46 PM »
Yes.

Are the notes from the Folio secondary market still updated to PeerCube every 2 hours?
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