Author Topic: New to LC/Few Questions/Advice  (Read 6057 times)

fliphusker

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Re: New to LC/Few Questions/Advice
« Reply #15 on: November 17, 2016, 05:23:48 PM »
Not many of the regular poster here invest on FOLIO.  FOLIO is definitely more time consuming.  You're not going to find any who are going to give up their secret sauce on FOLIO mainly due to the slim picking there.  (I looked through probably 260 notes last night just to buy 2.  I was being very picky.)
You mentioned a fairly aggressive strategy of C-G notes but you talk about starting looking at 7%, may I ask why?  I personally do not care if they are C-G I only care about their YTM in that regards. 
I tossed in NSR 36 month, 25 max for a note, current status (very important.), up/flat fico, 0 or better discount (-88 to 0), YTM of 12%, never late at yes and came up with 3,937 notes.  So you would have a ways to go to whittling that down to under 50 or even under 100.  (Which I do.)
As far as being too strict, that is something only you can answer.  Expanding your filters involves risk. 
Thanks. That was good reading. I will experiment around with Folio some. Hopefully NSR lets me weed through all the trash. I guess it would help lower time to maturity too if I invest in shorter term notes. Does only investing in clean payment history (by reviewing the payments with no late/1 max grace) up FICO notes at a discount sound like a good strategy? With 7%+ YTM.

There doesn't seem to be a lot of dicussion of Folio strategies on here. Any advice where to find more information?

Shawnthgreta

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Re: New to LC/Few Questions/Advice
« Reply #16 on: November 17, 2016, 05:59:09 PM »
Not many of the regular poster here invest on FOLIO.  FOLIO is definitely more time consuming.  You're not going to find any who are going to give up their secret sauce on FOLIO mainly due to the slim picking there.  (I looked through probably 260 notes last night just to buy 2.  I was being very picky.)
You mentioned a fairly aggressive strategy of C-G notes but you talk about starting looking at 7%, may I ask why?  I personally do not care if they are C-G I only care about their YTM in that regards. 
I tossed in NSR 36 month, 25 max for a note, current status (very important.), up/flat fico, 0 or better discount (-88 to 0), YTM of 12%, never late at yes and came up with 3,937 notes.  So you would have a ways to go to whittling that down to under 50 or even under 100.  (Which I do.)
As far as being too strict, that is something only you can answer.  Expanding your filters involves risk. 
Thanks. That was good reading. I will experiment around with Folio some. Hopefully NSR lets me weed through all the trash. I guess it would help lower time to maturity too if I invest in shorter term notes. Does only investing in clean payment history (by reviewing the payments with no late/1 max grace) up FICO notes at a discount sound like a good strategy? With 7%+ YTM.

There doesn't seem to be a lot of dicussion of Folio strategies on here. Any advice where to find more information?

I changed to C-E notes, since the downside looked steep/not well priced on F-G. When looking on Folio, YTM is most important? Does YTM include discounts or no? I forget about having to price in default risk as well. I am looking for 7% return at least. Preferably closer to 9%. I think I have decided I like the risk of my primary market strategy (based on back-testing), so I will just wait on the funds to get fully invested and be happy getting 8 or so primary notes a day. Thanks for all the help, I appreciate it.

fliphusker

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Re: New to LC/Few Questions/Advice
« Reply #17 on: November 17, 2016, 06:23:49 PM »
The stability of a loan is by far the most important.  Recent FICO drops and recent IGP or later are off the table for me no matter the discount.  I do set a pretty high YTM, 16% as I am fine with taking on risk.  (Ask me again in 6 months if I am still fine with this.)  When you search on NSR to buy loans it will show you the original yield and the YTM that incorporates either discount or premium for the note.
For a new investor, I would recommend sticking with primary market until you understand FOLIO more.  I believe in LC and its underwriting.  I went to the secondary market because of the good buys when people panicked after the CEO was forced out.  Now the good buys are mainly picked over by automation and people are not so eager to bail out at steep discounts. 
I wish ya good luck!!!
Not many of the regular poster here invest on FOLIO.  FOLIO is definitely more time consuming.  You're not going to find any who are going to give up their secret sauce on FOLIO mainly due to the slim picking there.  (I looked through probably 260 notes last night just to buy 2.  I was being very picky.)
You mentioned a fairly aggressive strategy of C-G notes but you talk about starting looking at 7%, may I ask why?  I personally do not care if they are C-G I only care about their YTM in that regards. 
I tossed in NSR 36 month, 25 max for a note, current status (very important.), up/flat fico, 0 or better discount (-88 to 0), YTM of 12%, never late at yes and came up with 3,937 notes.  So you would have a ways to go to whittling that down to under 50 or even under 100.  (Which I do.)
As far as being too strict, that is something only you can answer.  Expanding your filters involves risk. 
Thanks. That was good reading. I will experiment around with Folio some. Hopefully NSR lets me weed through all the trash. I guess it would help lower time to maturity too if I invest in shorter term notes. Does only investing in clean payment history (by reviewing the payments with no late/1 max grace) up FICO notes at a discount sound like a good strategy? With 7%+ YTM.

There doesn't seem to be a lot of dicussion of Folio strategies on here. Any advice where to find more information?

I changed to C-E notes, since the downside looked steep/not well priced on F-G. When looking on Folio, YTM is most important? Does YTM include discounts or no? I forget about having to price in default risk as well. I am looking for 7% return at least. Preferably closer to 9%. I think I have decided I like the risk of my primary market strategy (based on back-testing), so I will just wait on the funds to get fully invested and be happy getting 8 or so primary notes a day. Thanks for all the help, I appreciate it.

dmcnic

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Re: New to LC/Few Questions/Advice
« Reply #18 on: November 17, 2016, 08:21:59 PM »
Now the good buys are mainly picked over by automation and people are not so eager to bail out at steep discounts. 

I second that. I can find some good discounts throughout the day, but the timing is random. I have found nothing for two months with a decent discount after hours.

SLCPaladin

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Re: New to LC/Few Questions/Advice
« Reply #19 on: November 21, 2016, 03:16:16 PM »
I've never bought a note on folio, but I want to. The thing that scares me away is that I feel like I'm at a competitive disadvantage on the platform for a number of reasons. First off, I'm not a developer, so I can't auto-buy with scripts. But more than that, I feel like if a note is up for sale, I might be the sucker vacuuming up something that someone doesn't want, only I'm not clever enough to figure out what some in-house quant has cracked the code on. In other words, I am suspicious about the quality of the notes on the platform. My line of thinking is, "If these notes are being sold, maybe there's a reason that I should think twice about buying them." Call me cynical, conservative, or naive, that's just the way I think.

I'd be curious as to how other people buy notes and tackle the issue I struggle with. It's not obvious to me that simply buying a note at x% discount results in a better purchase than buying a fresh note off the regular LC platform. Of course I understand buying notes for individuals who live in restricted states, that's a whole other ball of wax. But I feel like if you're going to buy a note off of Folio, you have to figure out (a) whether the interest rate is better than what can be had on the retail LC platform (b) what the probability of default looks like for the note you are buying. Then, you have to come to some conclusion that justifies why buying a note on the secondary market is better than buying a newly issued note. Don't forget to factor in taxes!

I sat down one Sunday evening and came up with a fairly complex Excel formula that attempted to take into account interest rate differentials (e.g., notes issued recently have a higher interest rate, so even if one does manage to buy a discounted note on folio, it may not necessarily result in a higher return) and probability of charge-offs based on the vintage curve (using data from Insikt) and remaining life of the loan. I also made subjective adjustments such as, "What is the value (to me) of reducing my portfolio duration by buying a secondary note?" and "What about the prospect of rising interest rates?" Basically the question I was trying to answer was this: Is it better to buy a note on the secondary platform or just buy fresh loans.  The end result? It was super complicated and time consuming. I took a handful of notes and plugged them into my formula and found that some were better deals, but many were't. The sheer time this took, along with the nagging feeling that I might be missing something--possibly something big--has proved to be a significant barrier to making my first Folio trade. Maybe if this were a full-time thing for me I'd spend more time, but for now I'm just buying notes with basic filters on LC.

dmcnic

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Re: New to LC/Few Questions/Advice
« Reply #20 on: November 21, 2016, 07:49:46 PM »
I'd be curious as to how other people buy notes and tackle the issue I struggle with. It's not obvious to me that simply buying a note at x% discount results in a better purchase than buying a fresh note off the regular LC platform. Of course I understand buying notes for individuals who live in restricted states, that's a whole other ball of wax. But I feel like if you're going to buy a note off of Folio, you have to figure out (a) whether the interest rate is better than what can be had on the retail LC platform (b) what the probability of default looks like for the note you are buying. Then, you have to come to some conclusion that justifies why buying a note on the secondary market is better than buying a newly issued note. Don't forget to factor in taxes!

I have a small set of loan characteristics that I look for. These were determined by looking at historical loans and the charge-off rates for those characteristics. Only then do I look at the price of the loan. I can find quite a few that meet my criteria, but not my price.

I am good enough at scripting in Python that I can run a program to download and test the loans for sale on folio. Once a month I run tests on my assumptions (those characteristics I mentioned earlier) and make adjustments if necessary. It was certainly time consuming initially, but I am comfortable enough now that I run through a test only once per month.

Good job running through a scenario using folio loans, but if you are going to be convinced you are the sucker at the table, then folio isn't going to be for you. There are plenty of other options available in the marketplace.

SLCPaladin

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Re: New to LC/Few Questions/Advice
« Reply #21 on: November 23, 2016, 10:18:48 PM »
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I have a small set of loan characteristics that I look for. These were determined by looking at historical loans and the charge-off rates for those characteristics. Only then do I look at the price of the loan. I can find quite a few that meet my criteria, but not my price.

I am good enough at scripting in Python that I can run a program to download and test the loans for sale on folio. Once a month I run tests on my assumptions (those characteristics I mentioned earlier) and make adjustments if necessary. It was certainly time consuming initially, but I am comfortable enough now that I run through a test only once per month.

When you find loans that fit your buy criteria (i.e. your "secret sauce"), what is it that you use as a guide to determine whether to buy them off of Folio on the secondary market vs. newly issued loans? I guess what I'm getting at is, why not use those same loan characteristics to buy new notes off the platform? Surely you've answered this to your own satisfaction, I'd be curious to find out how you arrived at the answer.

In my mind, the main reason one would buy on the secondary market as opposed to the primary one is because you expect a better return. And to figure that out, you sort of have to make assumptions about the probability of default between the two available options (primary vs. secondary), price of the loan on the secondary market, and other personal investment preferences, such as having a shorter portfolio duration.

fliphusker

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Re: New to LC/Few Questions/Advice
« Reply #22 on: November 24, 2016, 02:10:17 AM »
Let me reverse that question for you and it will help understand why filters from primary do not carry over to secondary, at least for me.  We all know that from backtesting inquiries are one big fat warning sign, right?  If I buy a 60-month note on FOLIO with an up FICO and clean payment history, do I care about his inquiries 2 years ago?  Do you care that the note had a collection on a 60-month note with 36 payments that the collection could have been 12 months prior?
When you buy a new note you get a static FICO and no payment history except past payment history on other things.  While notes on FOLIO you can buy notes up to 59 months of payments, or 35 for a 36 month note with a clean payment history and FICO up. 
Is it safer?  A month after I started in FOLIO I had 2 of the same note and they went BK.  I also had 2 straight rollers on the primary.  I have had other recently bought notes go belly up a month after I bought them.  And others that have been IGP.
I can only hope that a 36-month note with 18 payments will continue.  As Fred noted in another thread, the 1% takes a greater chunk the older the note gets.  When a recession hits, is a 60-month note that is brand spanking new that meets strickt filtering better than a never late 60 month notes with 24 payments reaming?  I honestly do not know. 
You have to make a lot of assumptions on FOLIO as there is no data.  Backtesting just can not really come into play that much as the note already beat the odds of failing the first year or being fully paid off. 
Do I feel like I am riding by the seat of my pants on FOLIO?  At times, absolutely.  I wonder if others feel that way or if it is just me. 

When you find loans that fit your buy criteria (i.e. your "secret sauce"), what is it that you use as a guide to determine whether to buy them off of Folio on the secondary market vs. newly issued loans? I guess what I'm getting at is, why not use those same loan characteristics to buy new notes off the platform? Surely you've answered this to your own satisfaction, I'd be curious to find out how you arrived at the answer.

In my mind, the main reason one would buy on the secondary market as opposed to the primary one is because you expect a better return. And to figure that out, you sort of have to make assumptions about the probability of default between the two available options (primary vs. secondary), price of the loan on the secondary market, and other personal investment preferences, such as having a shorter portfolio duration.

SLCPaladin

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Re: New to LC/Few Questions/Advice
« Reply #23 on: November 24, 2016, 11:00:20 PM »
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You have to make a lot of assumptions on FOLIO as there is no data.  Backtesting just can not really come into play that much as the note already beat the odds of failing the first year or being fully paid off. 
Do I feel like I am riding by the seat of my pants on FOLIO?  At times, absolutely.  I wonder if others feel that way or if it is just me. 

The way I think about approaching this problem (and remember, I have yet to actually pull the trigger on buying a Folio note) is that I look at a Folio note and what vintage it is in and the number of remaining payments. I then look at the curve of the default for that specific vintage and arrive at an expected value for that note based on the probability of a default for each remaining month. I'm basically running a decay function for the note based on what I think other similar notes in that vintage are doing. Once I get that number, I run it against a similar new note in the same loan category (since I'm comparing primary vs. secondary). The default assumptions I use for the decay curve on primary market are based on most recent data and I then extrapolate 60 or 36 months. If the secondary note comes out with a higher total return, then I'd buy it. If not, then I'd buy the note on the primary market. My math probably only makes sense to me. I was just curious to hear what other people are doing, like if others had cracked the code and were willing to share.  It does sound like others may be flying blind.

dmcnic

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Re: New to LC/Few Questions/Advice
« Reply #24 on: November 25, 2016, 10:15:46 AM »
When you find loans that fit your buy criteria (i.e. your "secret sauce"), what is it that you use as a guide to determine whether to buy them off of Folio on the secondary market vs. newly issued loans? I guess what I'm getting at is, why not use those same loan characteristics to buy new notes off the platform? Surely you've answered this to your own satisfaction, I'd be curious to find out how you arrived at the answer.

When I buy any loan, I have the expectation that I will not be able to sell and will be forced to hold it until maturity. With that in mind, I am much stricter about the characteristics of a new loan versus a loan on the secondary market. For example, I calculate the monthly payment * 12 and divide by annual income. On the secondary market, I want that to be less than 10%. For a new issue, I want that to be less than 5%.

One of the methods I use to diversify the portfolio of loans is to have an equal investment amount in each of the months (I only buy 36 month loans, so I want an equal investment amount across the 36 months). I have found that is hard to achieve since loans with less than twelve months to maturity are almost never available with a discount.

I haven't cracked any code and the results are not perfect. Even a new loan I purchased went IGP before the first payment. Flying blind? Perhaps. The greatest risk I am assuming is trust. I am trusting that people are honest in their application. I am trusting that Lending Club has adequate controls. I am trusting that people will make the payments they promised to make. But I do not let those uncertainties stop me from continuing to pursue new opportunities on Folio or Lending Club.

SLCPaladin

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Re: New to LC/Few Questions/Advice
« Reply #25 on: November 25, 2016, 11:04:47 PM »
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The greatest risk I am assuming is trust. I am trusting that people are honest in their application. I am trusting that Lending Club has adequate controls. I am trusting that people will make the payments they promised to make. But I do not let those uncertainties stop me from continuing to pursue new opportunities on Folio or Lending Club.

I agree with you on the trust part. The biggest assumption I think I am making is implicit in decision to buy loans on the primary market at all, which is that I basically trust that LC is allocating loans to the fractional market fairly and that they are not saving a better segment of loans for bigger, institutional investors.

dmcnic

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Re: New to LC/Few Questions/Advice
« Reply #26 on: November 26, 2016, 12:40:13 PM »
I agree with you on the trust part. The biggest assumption I think I am making is implicit in decision to buy loans on the primary market at all, which is that I basically trust that LC is allocating loans to the fractional market fairly and that they are not saving a better segment of loans for bigger, institutional investors.

You seem to have a good method at evaluating loans on Folio. Why haven't you purchased anything there yet? Nothing hit your criteria?

SLCPaladin

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Re: New to LC/Few Questions/Advice
« Reply #27 on: November 27, 2016, 11:58:18 PM »
I agree with you on the trust part. The biggest assumption I think I am making is implicit in decision to buy loans on the primary market at all, which is that I basically trust that LC is allocating loans to the fractional market fairly and that they are not saving a better segment of loans for bigger, institutional investors.

You seem to have a good method at evaluating loans on Folio. Why haven't you purchased anything there yet? Nothing hit your criteria?

The biggest reason I haven't purchased on Folio is probably the time required to try to analyze whether a note is worth buying. Also, the tax implications are another thing I'm not looking forward to spending time on figuring out.

The other thing that made me reluctant to purchase on the secondary market is lack of historical data on performance of loans on the secondary market and the purchase price of these loans by grade and over time. I'd like to be able to have a lot more transparency into what is being sold on the platform as a whole and the performance of these notes.

Lastly, I worry about adverse selection. Many on this forum are looking to increase their returns by selling potential dud loans on Folio. That leads me to suspect adverse selection of the notes that are available on the secondary market. I'm just not confident (yet) that purchasing on the secondary market can be better that the primary market. Even if some people do outperform by purchasing on Folio, it's not obvious to me that I personally have a strategy or requisite skills to be in the group that does better.