Author Topic: a view of LC's deteriorating investor returns  (Read 24995 times)

AnilG

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Re: a view of LC's deteriorating investor returns
« Reply #60 on: March 16, 2017, 07:11:51 PM »
You can also hear how I sound like by listening to Peter's podcast in 2014 with me http://www.lendacademy.com/lap19-anil-gupta-of-peercube-on-p2p-lending-analysis/:)

Best part of that article ... we got to see a photo of Anil Gupta!  Now we know what you look like.
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Lovinglifestyle

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Re: a view of LC's deteriorating investor returns
« Reply #61 on: March 16, 2017, 10:50:28 PM »
Here's what I'm doing. 

I withdrew all my capital in 2016.  Now my mission is to withdraw cash to reimburse myself for taxes I've paid for prior years through the end of '16.  Add $500 for lost cash equivalent interest, and I'll be even except for '17 and thereafter taxes.  Meanwhile, I am still also reinvesting in new notes if there doesn't seem to be any reason not to.  Philosophy:  I want a return of my money while it's still there to grab back.  Am parking it in short term treasuries and credit union money market. 

AnilG

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Re: a view of LC's deteriorating investor returns
« Reply #62 on: March 17, 2017, 12:16:02 AM »
Sounds a reasonable strategy. It reminded me of my adventures in stock market in late 90s during dot com bubble. I used to buy momentum stocks that were appreciating too fast. When such stocks used to split or gain 100+%, I sold half and recovered my investment and let rest of them ride. Those were some adventurous times. I learnt a lot about stock market, trading and investing between 1993 and 2001. Only hobby still with me till now.

Here's what I'm doing. 

I withdrew all my capital in 2016.  Now my mission is to withdraw cash to reimburse myself for taxes I've paid for prior years through the end of '16.  Add $500 for lost cash equivalent interest, and I'll be even except for '17 and thereafter taxes.  Meanwhile, I am still also reinvesting in new notes if there doesn't seem to be any reason not to.  Philosophy:  I want a return of my money while it's still there to grab back.  Am parking it in short term treasuries and credit union money market.
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Anil Gupta
PeerCube Thoughts blog https://www.peercube.com/blog
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rawraw

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Re: a view of LC's deteriorating investor returns
« Reply #63 on: March 17, 2017, 05:32:31 PM »
Sometime, it is good to look back in time and see what were your expectations when you started and why? The written thoughts and published articles always help with such exercise. Just came across an old Lending Memo article from 2013 in which Simon (Where is he now?) surveyed some people about their "sustainable" return expectations. I thought it was interesting to look back on the optimistic outlook in 2013.

P2P Lending: What is an Expected Return? A Survey of Industry Voices
http://www.lendingmemo.com/peer-to-peer-lending-return/
Anil spot on!

mchu168

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Re: a view of LC's deteriorating investor returns
« Reply #64 on: March 19, 2017, 01:28:40 PM »
If you start with unrealistic expectations, you will surely be disappointed in the end.

Long run equity returns are expected to be mid to high single digit (5-8%). Most people expect longer-duration fixed income assets to have negative returns over the next couple of years. Real estate prices are in bubble territory in many markets.  What do you expect from P2P loans?

I used to think investing was about pushing all assets into one or two bets to maximize returns. 100% tech stock, 100% junk bonds, etc. But I've learned that being wrong with such concentrated bets can/will lead to disaster. So a better approach is to spread the risks around to many asset classes. Most will have positive returns over time and hopefully generate decent long-run risk adjusted returns. Trying to time any market is perilous and will almost always lead to regret and disappointment.  Diversification says I don't have to make the right bets all the time but I will be right in the long run.

P2P lending is definitely in a soft patch right now but therefore isn't this the right time to raise allocation to a struggling asset?  I don't have the answers and I'm not going to try to time this market either. But with diversification I can afford to be a little wrong in the short run...  :)

 
« Last Edit: March 19, 2017, 01:34:15 PM by mchu168 »

rawraw

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Re: a view of LC's deteriorating investor returns
« Reply #65 on: March 19, 2017, 04:02:28 PM »
If you start with unrealistic expectations, you will surely be disappointed in the end.

Long run equity returns are expected to be mid to high single digit (5-8%). Most people expect longer-duration fixed income assets to have negative returns over the next couple of years. Real estate prices are in bubble territory in many markets.  What do you expect from P2P loans?

I used to think investing was about pushing all assets into one or two bets to maximize returns. 100% tech stock, 100% junk bonds, etc. But I've learned that being wrong with such concentrated bets can/will lead to disaster. So a better approach is to spread the risks around to many asset classes. Most will have positive returns over time and hopefully generate decent long-run risk adjusted returns. Trying to time any market is perilous and will almost always lead to regret and disappointment.  Diversification says I don't have to make the right bets all the time but I will be right in the long run.

P2P lending is definitely in a soft patch right now but therefore isn't this the right time to raise allocation to a struggling asset?  I don't have the answers and I'm not going to try to time this market either. But with diversification I can afford to be a little wrong in the short run...  :)

 
I agree.  Although I don't quite know how to think about timing LC returns yet, since theoretically it is easier to get back in and not dependent on gains missed while in cash to the same degree as stocks.  But my first impression is that it is still a bad idea to try and 'time the market'

AnilG

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Re: a view of LC's deteriorating investor returns
« Reply #66 on: March 19, 2017, 07:45:16 PM »
The value of most P2P loans once defaulted goes to zero with no chance of that value to ever recovering to pre-default value.  The "buy low sell high" assets (majority) sooner or later will rise to the implicit value of those assets after their "struggle" phase is over. Though few such assets do become worthless before they had chance to recover. This is the main difference between P2P loans versus the "struggling" assets that you want to buy low and sell high.

P2P loans are discontinuous assets, they exist for fixed period (much shorter duration than typical "buy low sell high" assets) and then expire and new ones are created. There is no relationship between an old "struggling" P2P loans with new "promising" P2P loan. You will not be rewarded for buying and holding "struggling" old P2P loans as once their life expires they can't be resuscitated. In this scenario, you will prefer to avoid buying during struggling phase and wait until you believe the "struggle phase" has passed and then you enter P2P loans market by buying new P2P loans.

P2P lending is definitely in a soft patch right now but therefore isn't this the right time to raise allocation to a struggling asset?  I don't have the answers and I'm not going to try to time this market either. But with diversification I can afford to be a little wrong in the short run...  :)
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Anil Gupta
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.Ryan.

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Re: a view of LC's deteriorating investor returns
« Reply #67 on: March 20, 2017, 12:45:47 AM »
Sometime, it is good to look back in time and see what were your expectations when you started and why? The written thoughts and published articles always help with such exercise. Just came across an old Lending Memo article from 2013 in which Simon (Where is he now?) surveyed some people about their "sustainable" return expectations. I thought it was interesting to look back on the optimistic outlook in 2013.

P2P Lending: What is an Expected Return? A Survey of Industry Voices
http://www.lendingmemo.com/peer-to-peer-lending-return/

Great article Anil (and great foresight by you as well in your predictions!).

The issue that I have is that we have hit the bottom of the forecasts (~5-6% returns) while conditions are still very strong (strong economy, strong consumer credit performance, etc...). I'm not convinced that the 5-6%(or whatever your diminished returns look like now) we're seeing as the long term average; I'm seeing it as the average during the optimal conditions, which we wont be in forever.

Am I foolish to believe 5-6% is not the long term average, but in fact, the new 'tops'? What are you expecting to returns to look like during a recession? Do you ever see returns rising beyond what we're seeing today?


Fred

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Re: a view of LC's deteriorating investor returns
« Reply #68 on: March 20, 2017, 02:21:47 AM »
Here's what I'm doing. 

I withdrew all my capital in 2016.  Now my mission is to withdraw cash to reimburse myself for taxes I've paid for prior years through the end of '16.  Add $500 for lost cash equivalent interest, and I'll be even except for '17 and thereafter taxes.  Meanwhile, I am still also reinvesting in new notes if there doesn't seem to be any reason not to.  Philosophy:  I want a return of my money while it's still there to grab back.  Am parking it in short term treasuries and credit union money market.

Looks like the LC Party is over for many people -- including me. 

Time to go home, get some sleep, and find a new "game" tomorrow.

If I am not restricted by my employer to do short-term trading, I may go back to options again.  However, I may have to accept investing in ETFs for a foreseeable future.

rawraw

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Re: a view of LC's deteriorating investor returns
« Reply #69 on: March 20, 2017, 07:50:45 AM »
Sometime, it is good to look back in time and see what were your expectations when you started and why? The written thoughts and published articles always help with such exercise. Just came across an old Lending Memo article from 2013 in which Simon (Where is he now?) surveyed some people about their "sustainable" return expectations. I thought it was interesting to look back on the optimistic outlook in 2013.

P2P Lending: What is an Expected Return? A Survey of Industry Voices
http://www.lendingmemo.com/peer-to-peer-lending-return/

Great article Anil (and great foresight by you as well in your predictions!).

The issue that I have is that we have hit the bottom of the forecasts (~5-6% returns) while conditions are still very strong (strong economy, strong consumer credit performance, etc...). I'm not convinced that the 5-6%(or whatever your diminished returns look like now) we're seeing as the long term average; I'm seeing it as the average during the optimal conditions, which we wont be in forever.

Am I foolish to believe 5-6% is not the long term average, but in fact, the new 'tops'? What are you expecting to returns to look like during a recession? Do you ever see returns rising beyond what we're seeing today?
Credit cycles do not need to align with economic problems, although economic problems often cause credit cycles. You can have problems in credit from competition and loosening of terms. That seems to be what happened here, which is why the hiccup isn't nearly as bad as if the loosening of terms met a weak economy. The question is whether this improves the underwriting before a recession or if the deterioration in standards  continues

Sent from my SAMSUNG-SM-G935A using Tapatalk


mchu168

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Re: a view of LC's deteriorating investor returns
« Reply #70 on: March 20, 2017, 08:26:52 AM »
The value of most P2P loans once defaulted goes to zero with no chance of that value to ever recovering to pre-default value.  The "buy low sell high" assets (majority) sooner or later will rise to the implicit value of those assets after their "struggle" phase is over. Though few such assets do become worthless before they had chance to recover. This is the main difference between P2P loans versus the "struggling" assets that you want to buy low and sell high.


The rough patch is the degradation in underwriting. I'm assuming Lending Club overcompensates for weak returns by tightening up lending standards. 

mchu168

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AnilG

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Re: a view of LC's deteriorating investor returns
« Reply #72 on: March 20, 2017, 08:52:49 PM »
What makes you think that ~5-6% return is the bottom for P2P loans?

Some of the best performance (low default or loss rate) of P2P loans was encountered during recovering economy from loans issued during and just after recession. This is typical for all type of debt. During recession, credit criteria tend to be strict so debt gets issued to fewer and best quality borrowers. As borrower's financial situation improves with rising economy, fewer debt to borrowers go bad resulting in best performance for lenders.

Some of the worst performance (high default or loss rate) of P2P loans will be encountered as we slide into recession from the loans just before recession. This is typical for all type of debt. During good economic times, credit criteria tend to be loose so debt gets issued to large number of and marginal borrowers. As borrower's financial situation deteriorates with declining economy, more debt to borrowers go bad resulting in worst performance for lenders.

As we haven't gone through a downturn with Lending Club loans yet, we don't have handle on how bad things can go. A good way to visualize the worst case performance is to use 20+% default/loss rates of Prosper loans issued between 2005 and 2008 and apply to your loans.

Great article Anil (and great foresight by you as well in your predictions!).

The issue that I have is that we have hit the bottom of the forecasts (~5-6% returns) while conditions are still very strong (strong economy, strong consumer credit performance, etc...). I'm not convinced that the 5-6%(or whatever your diminished returns look like now) we're seeing as the long term average; I'm seeing it as the average during the optimal conditions, which we wont be in forever.

Am I foolish to believe 5-6% is not the long term average, but in fact, the new 'tops'? What are you expecting to returns to look like during a recession? Do you ever see returns rising beyond what we're seeing today?
---
Anil Gupta
PeerCube Thoughts blog https://www.peercube.com/blog
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JohnnyP

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Re: a view of LC's deteriorating investor returns
« Reply #73 on: March 20, 2017, 10:45:38 PM »
Anil, it sounds like you believe we are on the weak side of a credit cycle. How would this (or how is it presenting itself)? You mentioned competition and loosening. It seems that LC is affected by both. When I look at performance on existing loans, I see that ALL of them are taking a hit. Even 60 month loans in the 2014 vintage have come way off in performance. It is not just the 2015 and 2016 vintages that everybody complains about. That seems to tell me that there is a lot of competition for LC customers these days. Maybe LC competitors have loosened up to the point that LC customers pile on more debt until it becomes default time. We hear fears that borrowers are stacking. We also hear from Lending Club that they see issues with people that have a penchant for taking on too much debt. We also see prepayments rising. In my mind, prepayments are a relatively small hit. These two things are just indicators of the real problem. The real hits seems to be additional borrowing by people that I have already loaned money to.

jheizer

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Re: a view of LC's deteriorating investor returns
« Reply #74 on: March 20, 2017, 11:02:03 PM »
Every single time I log into my amex account they are harassing me to take out a loan.
Replacement to P2P Quant's Percentile Tool http://lc.geekminute.com