Author Topic: I thought the LC IPO was a good thing...boy was I wrong  (Read 7402 times)

anabio

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I thought the LC IPO was a good thing...boy was I wrong
« on: September 11, 2016, 02:19:26 PM »
I watched LC for over a year before I started investing because I wanted to wait until the IPO. The reason for the IPO wish was because I thought that LC would be less likely to go bankrupt/out of business if it was public. I still think that was a correct concept.

I now believe the IPO was not as good as I thought. I will provide a chart later that shows the detail but I have encountered "way more" defaults than LC estimated I would have when I first invested with them. The info below shows this.

Loan        LC's charge      My charge off
Grade      off rate             rate
        As of:mar 2014        Sept 11 2016
A             1.63%               6.31%
B             3.57%               7.23%
C             5.22%             13.99%

To be honest I no longer remember where I got that LC expected rate 3 years ago but I got it from somewhere on LC's web site and wrote it down for future use.

That begs the question: Why is my charge off rate so much higher than what LC estimated when I first started investing?

I guess some of you will say I had a "crappy" filter and invested in all the wrong notes. But that is not the case. For 84% of my note purchases I used LC's automated investing tool and went conservative: 40% A, 40% B, 20% C. No other filter except 36 month term. I did this because I assumed LC's expected charge off rate was based upon the "totality" of their loans in each rate category. So I assumed that is what I would get. If you use filters correctly you should get lower charge offs, but then there would be fewer loans available so money would sit idle for a long time.I was happy with the average so I did not filter. I only invested my "play money" and was content to invest and watch before investing my "non play money". I never got into the non play money pot because I turned bearish on LC as I started seeing how it really played out.

In March, April, May 2014 I invested $30,000. After that point I just re-invested the proceeds. When I started re-investing I used filters and mainly invested in C loans with some A/B. My filter was simple:

Only loans under $10,000, 3 years job, 1 or less inquiry, $24,000+ income, 3 year term, no California (I know...and I LIVE in CA).

I think the reason for my higher defaults is because when LC went public they HAD to show they would be profitable for their shareholders. That meant they HAD to increase their loan originations. I think LC loosened their loan rules in order to increase the number of loans and did not adjust their estimated default rates (until recently, supposedly...unfortunately for me). That is now playing out, causing a higher than estimated default rate.

I would REALLY be interested if someone who invested a couple years before the IPO and continued investing after the IPO would produce a chart like mine below. It would be interesting to see how the default rates compared pre IPO and after IPO.
As Will Rogers stated: : I'm not as concerned about the return on my money as I am the return of my money

storm

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Re: I thought the LC IPO was a good thing...boy was I wrong
« Reply #1 on: September 11, 2016, 04:36:15 PM »
Past performance is not necessarily indicative of future results.

Fred93

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Re: I thought the LC IPO was a good thing...boy was I wrong
« Reply #2 on: September 11, 2016, 04:58:13 PM »
I have encountered "way more" defaults than LC estimated I would have when I first invested with them. The info below shows this.

Loan        LC's charge      My charge off
Grade      off rate             rate
        As of:mar 2014        Sept 11 2016
A             1.63%               6.31%
B             3.57%               7.23%
C             5.22%             13.99%

To be honest I no longer remember where I got that LC expected rate 3 years ago but I got it from somewhere on LC's web site and wrote it down for future use.

Is it possible that the numbers in the left column were "annual" whereas the numbers in the right column are "cumulative"?  It is unfortunate that you don't have the source where you got those numbers on the left.  If you did we could go back and look to see exactly what it said.  I'm guessing those were annual numbers.  They look about right for annual numbers.

For example, if 5% of loans fail per year on the average, then for 3-year loans you would expect a 14.3% cumulative fail.
1 - (1-5%)(1-5%)(1-5%) = 14.3%

If this guess is right, your numbers don't look all that far off LC's predictions.

Also, your spreadsheet shows your numbers getting worse over time, but I suspect that is because you started counting near the time you started investing.  Young loans haven't had much time to fail yet, so if your portfolio was heavy with young loans on those early dates, you would expect lower cumulative fail rates, because loans hadn't experienced much of their lifetime yet.  Over the life of a particular vintage of loans, cumulative fail rates go up, as failures accumulate.  Therefore, I'm guessing that the ramp we see in your spreadsheet is simply due to the aging of loans in your portfolio.

Also, you might find this interesting...
http://additionalstatistics.lendingclub.com/performance-files/

Here LC publishes a spreadsheet containing cumulative chargeoff curves broken out by vintage.  You can grab the numbers and compare or plot or whatever.
« Last Edit: September 11, 2016, 05:01:43 PM by Fred93 »

Fred93

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Re: I thought the LC IPO was a good thing...boy was I wrong
« Reply #3 on: September 11, 2016, 06:23:36 PM »
I would REALLY be interested if someone who invested a couple years before the IPO and continued investing after the IPO would produce a chart like mine below. It would be interesting to see how the default rates compared pre IPO and after IPO.

This chargeoff rate curve is provided by INSIKT, showing LendingClub's entire loan database.  You can make many selections in the menu above.  You can break it down by grade or term etc.  You can look at delinquency or chargeoff.  They allow so much control that you have to work with it a bit before you understand all the variations. 

This is chargeoff composite of all grades both terms.  Note that this is a monthly chargeoff rate, so you have to scale it up to get annual.
https://www.insikt.com/#/invest/mycro/timeSeries/cumLossTS?po=Partner&or=LendingClub&fi=none&lt=36,60


rawraw

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Re: I thought the LC IPO was a good thing...boy was I wrong
« Reply #4 on: September 11, 2016, 07:31:08 PM »
6% on A?  Are you sure the math is correct?  Looks way too high.

anabio

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Re: I thought the LC IPO was a good thing...boy was I wrong
« Reply #5 on: September 11, 2016, 09:08:44 PM »
Is it possible that the numbers in the left column were "annual" whereas the numbers in the right column are "cumulative"?  It is unfortunate that you don't have the source where you got those numbers on the left.  If you did we could go back and look to see exactly what it said.  I'm guessing those were annual numbers.  They look about right for annual numbers.

For example, if 5% of loans fail per year on the average, then for 3-year loans you would expect a 14.3% cumulative fail.
1 - (1-5%)(1-5%)(1-5%) = 14.3%

If this guess is right, your numbers don't look all that far off LC's predictions.


Those LC numbers could have been annual? Well, if that don't beat all....???

I don't remember where I got those numbers from, but I did get them from some LC information. I honestly thought they were "life of the loan" numbers. You know...through the life of a loan out of 100 C loans 5.22 of them would charge off. It never entered my mind that that was a per year figure. If they were annual then, what can I say...whoops  :-\
As Will Rogers stated: : I'm not as concerned about the return on my money as I am the return of my money

anabio

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Re: I thought the LC IPO was a good thing...boy was I wrong
« Reply #6 on: September 11, 2016, 09:16:17 PM »
6% on A?  Are you sure the math is correct?  Looks way too high.

Hmmm.... just rechecked and yes the math is correct; did it in a spreadsheet. For instance in March of 2014 I bought 147 A notes. As of Friday 14 of those notes are charged off for a 9.5% rate.

In total I have purchased 428 A notes and 27 of those have charged off. That makes a 6.31% rate.
As Will Rogers stated: : I'm not as concerned about the return on my money as I am the return of my money

rawraw

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Re: I thought the LC IPO was a good thing...boy was I wrong
« Reply #7 on: September 12, 2016, 03:51:19 AM »
6% on A?  Are you sure the math is correct?  Looks way too high.

Hmmm.... just rechecked and yes the math is correct; did it in a spreadsheet. For instance in March of 2014 I bought 147 A notes. As of Friday 14 of those notes are charged off for a 9.5% rate.

In total I have purchased 428 A notes and 27 of those have charged off. That makes a 6.31% rate.
You need to use dollars not count. And you need to use annual rates, not gross

I'm positive any number you got from the website is annual, not life of loan.

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« Last Edit: September 12, 2016, 03:52:54 AM by rawraw »

anabio

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Re: I thought the LC IPO was a good thing...boy was I wrong
« Reply #8 on: September 12, 2016, 10:07:23 AM »
You need to use dollars not count. And you need to use annual rates, not gross

I'm positive any number you got from the website is annual, not life of loan.

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Well...I admit when I am wrong and I was wrong--twice.
I re-calculated based on those numbers being annual and dollars.

Revised annualized loss percentage is as follows:

Loan        LC's charge      My charge off
Grade      off rate             rate
        As of:mar 2014        Sept 11 2016
A             1.63%               1.41%
B             3.57%               2.14%
C             5.22%               4.24%

Hmmm...kind of makes me wonder what I would have decided in Jan of 2015 if I would have used these numbers. I could have easily kept on re-investing earnings...but maybe not because  the recession that I believe is coming soon would still have been on my mind and I could have chickened out. But this is my play money so I could have just brazened it out. Think I'll just keep letting my portfolio age out and then could start all over again in a couple of years...providing LC still has loans available for retail investors then.

Hindsight is golden...but...as I sit  here now I am content..and isn't that what life is all about?
As Will Rogers stated: : I'm not as concerned about the return on my money as I am the return of my money

rawraw

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I thought the LC IPO was a good thing...boy was I wrong
« Reply #9 on: September 12, 2016, 10:08:48 AM »
Those numbers look much more what I'd expect. The reason we use annual numbers is because interest rates are an annual number as well. And monthly amortization makes not all defaults equal in terms of loss

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SLCPaladin

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Re: I thought the LC IPO was a good thing...boy was I wrong
« Reply #10 on: September 12, 2016, 02:44:55 PM »
Quote
Hindsight is golden...but...as I sit  here now I am content..and isn't that what life is all about?

I enjoyed reading the evolution of this thread from a psychological angle. It must be a pleasant surprise to find out, after re-running the numbers, that you've done much better than you thought. The interesting thing to reflect on is how nothing actually changed in terms of your performance. Initially you felt bummed out, but then once you discovered that it wasn't so bad, you felt much better, even "content". All the while nothing materially changed.

Behavioral economics is fascinating to me. I often find myself trying to analyze the irrationality of my own investing behavior.  I've oscillated between patting myself on the back for finding returns in an asset class few knew much about to worrying about being too heavy in something unproven and untested. I've seen my returns fall as my portfolio ages and as defaults rise ever so slightly. On more than one occasion I've had to check myself and say, "7-8% is return isn't as good as 10-11%, but it's still nothing to sneeze at. It's much better than a sharp poke in the eye." Funny how our contentment is strongly impacted by our expectations.

SeanMCA

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Re: I thought the LC IPO was a good thing...boy was I wrong
« Reply #11 on: September 12, 2016, 04:57:45 PM »
Quote
Hindsight is golden...but...as I sit  here now I am content..and isn't that what life is all about?

I enjoyed reading the evolution of this thread from a psychological angle. It must be a pleasant surprise to find out, after re-running the numbers, that you've done much better than you thought. The interesting thing to reflect on is how nothing actually changed in terms of your performance. Initially you felt bummed out, but then once you discovered that it wasn't so bad, you felt much better, even "content". All the while nothing materially changed.

Behavioral economics is fascinating to me. I often find myself trying to analyze the irrationality of my own investing behavior.  I've oscillated between patting myself on the back for finding returns in an asset class few knew much about to worrying about being too heavy in something unproven and untested. I've seen my returns fall as my portfolio ages and as defaults rise ever so slightly. On more than one occasion I've had to check myself and say, "7-8% is return isn't as good as 10-11%, but it's still nothing to sneeze at. It's much better than a sharp poke in the eye." Funny how our contentment is strongly impacted by our expectations.

I wish I could "upvote" this comment.
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Rob L

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Re: I thought the LC IPO was a good thing...boy was I wrong
« Reply #12 on: September 12, 2016, 05:13:56 PM »
Yeah, I'll second that up vote.
The 40,000 generations of humans that preceded us left us with a lot of emotional baggage that is a real hazard to our long term financial health.
We are often our own worst enemies as empirical studies have shown time and time again. Why is so simple so hard?

anabio

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Re: I thought the LC IPO was a good thing...boy was I wrong
« Reply #13 on: September 12, 2016, 06:38:12 PM »
Quote
Hindsight is golden...but...as I sit  here now I am content..and isn't that what life is all about?

I enjoyed reading the evolution of this thread from a psychological angle. It must be a pleasant surprise to find out, after re-running the numbers, that you've done much better than you thought. The interesting thing to reflect on is how nothing actually changed in terms of your performance. Initially you felt bummed out, but then once you discovered that it wasn't so bad, you felt much better, even "content". All the while nothing materially changed.


There is a kernel of truth in your observation...but I must say one thing. My contentness is not necessarily only because I realize my charge offs were not as bad as I thought. I am content because my bungling led me down the path to be exactly where I want to be. ???

My contentness is largely influenced by my realization on how "uncontent" I would be right now if I would have known the true low figure of chargeoffs and therefore would have kept re-investing since Jan 2015. If that would have happened then I would have been a lot more uncontent since May 9. Uncontent because I would not have realized until May 9 2016 (rather than a year and a half earlier) that I really don't want to be in LC at this point in time--and it would have been a lot harder to get out.

Because of errors on my part I stopped investing and began pulling money out 17 months before the May 9 debacle and am no longer worried about a recession in 6 months or about those LC shareholder lawsuits that might come down in the future, or about LC going under without a BRV, etc.

In this case two wrongs made a right. All because a mistake on my part made me able to make an easy choice in January of 2015. So, in hindsight I guess I'm glad I made that mistake.

As Will Rogers stated: : I'm not as concerned about the return on my money as I am the return of my money

lascott

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Re: I thought the LC IPO was a good thing...boy was I wrong
« Reply #14 on: September 13, 2016, 10:51:50 AM »
<snip>On more than one occasion I've had to check myself and say, "7-8% is return isn't as good as 10-11%, but it's still nothing to sneeze at. It's much better than a sharp poke in the eye." Funny how our contentment is strongly impacted by our expectations.
Yes, great post. I'm only at just over 5% using XIRR or just over 6% based on LC ANAR ... but I was using LC as a partial replacement for the bonds part of my asset allocation so I'm still 'better' off and I content/even_happy about that.
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