Three Days with the G2

A Thawing Tioga Lake in late May, 2008

I've had the iPhone 3Gs since June 2009 and while I enjoy everything good about the platform, the grating "my way or the highway" doctrine around everything Apple keeps sending me on these off ramp excursions. This write-up is about one such 3-day exit on an off-ramp from Apple highway.

T-Mobile worked hard to get my business, including an allowance to ease the breakup fee

Thumbs Up Mint.com; Thumbs down PayPal...

A view from Hoover Dam, Dec 2009

     I have been using Quicken for more than a decade and average a desktop session a couple of times a week with the application. In Quicken, I do a sweeping download of all transactions in all accounts. Most accounts are set to auto-reconcile with the online balance and 95% of transactions are automatically classified into their respective budget categories. When Intuit acquired Mint.com, I joined in and let Mint monitor my active credit cards and a few other accounts. That little effort returned an effective result.

Order Complete; All Notes Issued... (2) Filters & Workflow

O'Shaunessey Dam from Wapama Falls at Hetch Hetchy, April 2010

Let me jump right into 'what' I do in the 5-8 minutes I spend each time I login to LendingClub, the 'why' will follow.

• On the Account Summary page, I first click on the "Invest" link which brings up the Build a Portfolio page.
• After a short delay, the page is populated with the count and what's possible from currently available notes: the total number, the three automatic portfolio selection buttons, each with their predicted rate of return - a conservative, moderate and an aggressive option:

On the right there is a "More Options" button where you can dial in your preferred rate and get a basket of notes recommended. If you wish the entire available amount could be invested - all in one fell swoop! I, however, prefer to do my own filtering. I click on the "Open" link in the Filter Notes box along the left column.

• I have a saved filter that I select which causes the number of notes to shrink to about 20% of the total number available. More on my filter below.
• One of the filter items that I include but leave without a value is the Funding Progress slider. Depending on the amount of time I have in any given login session, I slide this over to 50%, if I'm not rushed and 80% if I only have a minute or two. This filter reduces the resulting number of notes to just a handful that already have lenders.
• I click on the number of notes available to actually see a list. Strangely, the notes are presented in some random order. I click the "Rate" link twice to sort the short-list into descending interest rate order.

Finally, starting with the note offering the highest rate, I begin my manual analysis.

The Filter

Having scoured through the Statistics pages at LendingClub, running Excel Pivot Tables on the downloaded data and through my own learning from non-performing loans in my trial account, I've come to rely on the following filter criteria for hand picking notes in my IRA.

• "Reviewed by LendingClub" - I only look at notes that have been approved. It is my perception that almost 25% of notes that are initially presented do not get approved - since I am investing time on each loan, I find this filter worthwhile. Committed funds to unapproved notes are returned to the available funds pool after a few days. This filter may not be as important when using automated investment tools.
• "Interest Rate" - having set a goal to have a portfolio yield above 10%, I exclude grade A loans which yield below 10%. Based on statistical analysis of yields for each grade, I used to filter out grade F notes too, but it appears there was an anomaly in F grade loans in the early days. You can see the change in borrower selection criteria has had a marked effect on the overall default rate which, as of this writing, is 2.11% annualized across the entire LendingClub platform.

• "Loan Purpose" - This filter has been derived from the pivot table exercise, the statistics page and my own experience with non-performing notes in my trial account. The filter I use only shows me notes with the following stated purpose: Refinancing credit card; Consolidate debt; Renewable energy financing; Wedding expenses; Paying for dream vacation; and Other. A word on the two odd appearing purposes - Wedding and Vacation. My initial instinct was to refrain, but statistically, the default rate on these two is extremely low - counter intuitive at first blush. Right?
• "Term" - my initial pass picks 60-month notes only. Two reasons: higher yield and lower fees for same class of borrower and 2 years longer earning period for same time spent on selection. However, if in a given note picking session I don't find enough notes to invest in, I'll turn off the 36-month filter and take a look at those notes too.
• "Exclude Loans already invested in" - this one is obvious.
• Finally, "Funding Progress" - I try not to buy into notes that have not had at least 50% funding commitment, mostly because by the time the notes get this level of commitment other lenders have asked questions and received answers, the broad lender sentiment is visible and you know the note will close in the next few days causing your funds to begin working sooner.

Once this saved filter is applied and results updated, the original set of notes gets whittled down to a very manageable set that I process individually.

The Manual Analysis

With a list of only about a dozen or twenty notes sorted in descending rate order, I begin my final selection. Starting at the top, clicking on the loan title, which is a hot-spot even if it doesn't look like one, the load summary appears in a drop-down. I then scan for the following:

1. Eyeball the ratio of Monthly Payments/Gross Income - I try not to go too far north of 10% on a 60-month note, with a little more latitude on the 36-month, the theory being: lend to borrowers who can afford to service the debt. Unfortunately, this is not a filter that can be programmed today. I look for the green check mark next to Gross Income, if one exists, my lending confidence goes up since the income has been verified.
2. Scan through the Revolving Credit Balance and Line Utilization - filters do exist to handle these criteria - but I've noticed that the credit reports are often inaccurate and lump debts together and can skew the filter. If utilization is high (>80%) I'll take a closer look if other aspects are favorable, if not, I may pass on the note.
3. Length of employment - again, it's possible to filter on this, perhaps I should. I typically do not lend to those employed less than 1 year - unless they are employed by a known main-stream employer.
4. Loan Description and Q&A - I'll walk away if there is no loan description AND there are no answers. Sometimes notes get funding without these - perhaps through automated funding, I avoid them. In case the note is for debt consolidation - I'll look for the kind of debt the borrower is funding. I pass on the note if I see the borrower being irresponsible, funding low rate debt with a higher rate LendingClub note in the name of convenience. I've seen 9% loans being repaid with 15% notes. I also scan for any issues with borrower attitude.

Determining size of loan fraction

This is a very nebulous item. I've noticed that the amount I invest in a note depends on my mood, level of comfort with the statistics and the Q&A. The only numerical guidance I sometimes use is to determine the average per lender investment in the note so far. Unfortunately, determining that figure is labor intensive so I look at it only if I feel a strong urge to. To get that figure, one must look at the 'complete listing' - a link is available just below the loan description section.

In Conclusion:

As I wrote this blog, I went through a real-time note buying session and you can see that I was able to buy 6 notes worth $425 that met my criteria. Click on the next link and you can see what my methods have allowed me to achieve over the last seven months, a  reasonable placement rate, varying between 102 notes in March and 39 in April yielding expected rates between 14.49% in February and 16.12% in July.

Finally, reiterating the caveat: my filters and methods represent my personal appetite for risk - I guarantee that yours will be different. Do share your thoughts and experience. I hope this has been helpful. 

Here's to low default rates and happy peer-to-peer lending!

Order Complete; All Notes Issued... (Part 1)

O'Shaughnessy Dam at Hetch Hetchy, April 2010

     I didn't like when I received notification that of the notes I had picked a certain number didn't issue and the funds were returned for re-investment. It felt like being cheated of the time I had spent picking them. I have since developed a workflow and filters that have made the "Order Complete; All Notes Issued..." email a more frequent occurrence.
     Admittedly, my LendingClub portfolio is young - only seven months for my IRA - and eleven for the original trial account, hence caveat emptor - what I'm about to share are my ideas and methods and represent my risk profile. Yours will be different - guaranteed! I hope as a LendingClub investor, you, the reader, will be able to adapt or outright reject some of the ideas presented.
     I wrote about how I was able to justify moving a portion of my IRA to LendingClub in my post: Peer-To-Peer Lending in a Balanced Portfolio: Justified!. I made that commitment after familiarizing myself with the goings on and workings of LendingClub and the process of “note-picking”. In my trial account I allowed myself latitude including the use of automatic selection tools and kept these notes in separate portfolios to keep track. Several excellent webinars organized by LendingClub for investors were a big help. The one I got the most out of was by Scott Langmack in October, 2009 entitled, "Higher Returns Through Diversification". Watch the webinar if you are new to LendingClub. I particularly liked his personal thoughts on hand-picking notes as part of the Q&A session exactly 37 min into the presentation. What I have to say here is just once instance, you’ll serve yourself well by browsing through Scott Langmack's website, reviewing the vast investor information he has placed for public consumption.
     The charts below are a snapshot of what my IRA looks like today:

Ever since LendingClub introduced 60-month notes, I've preferentially purchased them and they now make up 34% of my holdings. 60-month notes provide a premium in rates for the same borrower risk profile. The portfolio note composition, as of this writing, with 621 notes is as follows:

• In Funding - 7
• Issued & Current - 597
• Fully Paid - 11
• Late 16-30 days - 3
• Late 31-120 days - 3
• Default - 0
• Charged Off - 0

     On the other hand, my trial account looks like:

No 60-month notes in this account and you can see, it is seeing it’s fair share of defaults, 3, and five are on the brink from a pot of 182, while the IRA has 3 notes on the brink in a pot of 621 – let reiterate, my portfolios are young and I expect more defaults. I am hoping I am able to stay below the 3% LendingClub lifetime default rate average across all notes. The fact is: loans do go bad. Hence, the importance of diversification – what better way than to lend to hundreds of borrowers? LendingClub makes it easy to do with just $25 per note. It’s a whole lot safer than lending to a friend – if that loan goes bad you lose both money and the friend!
     I am still hand picking each note – on first blush, it may seem like too much work – and it was, before I got myself a workflow. Now I spend between 5 and 8 minutes any time I want a break to run a bunch of filters, eye-ball some ratios and finally scan the Q&A section of the offering. My basis for the fraction of the note to be purchased remains nebulous – and I just go with my gut – buying in from $25 to $250 chunks with only a couple on the high end. With this methodology, I have been able to achieve a purchase volume ranging from a low of 39 notes to a high of 102 notes in a month with weighted average monthly portfolio rates between 14.5% and 16.12%. The entire portfolio comes in around 15%.
     Ouch, this post is getting long... in my next write-up, I will go through my filters and subjective criteria. Consider following this blog so you know when it is published and do comment! Happy P2P-Lending!

Peer-To-Peer Lending in a Balanced Portfolio: Justified!

June Lake, CA in June, 2009

Certified Financial Planners are taught to shift to more conservative distribution of investments for clients as they get older and are faced with college expenses and retirement. This rebalancing typically begins in the late 40s or slightly later, depending on how old your kids are. Equity positions are sold, ideally locking in years of appreciation and funds are placed in instruments that deliver a fixed income while preserving capital.

I was presented with such an option last year, with college expenses 3 years away. Unfortunately, fixed income instruments at the time were yielding between 2% and 3% before tax on 3 to 4 year terms. Dismal. Not too thrilled about locking cash up at those rates and calling it ‘income’, I was on a prowl for alternatives.

I believe I caught a news blurb about Harvard Business Review’s pick of their Top 20 Breakthrough Ideas of 2009. I became intrigued by LendingClub and the peer-to-peer lending concept and opened a small $1,000 account to find out first hand.

I am a Schwab Private Client and at the next quarterly review, I asked them about LendingClub – I explained the concept and let them do some homework. They pointed out that in a portfolio diversification and liquidity were important considerations. I explained how LendingClub worked as best I knew how and highlighted that LendingClub allows fractional purchase of notes for as little as $25. At the $25 level, one could invest in 40 different loans with only $1,000 of capital. Loans range from Grade-A paying around 7% where borrowers have FICA scores north of 780, to Grade-G which pays as high as around 22% and borrowers typically have scores just north of 660 and every flavor in between. Diversification - done!

At a follow-up phone call with my advisor, I got an unofficial thumbs-up. Being that Schwab had not reviewed LendingClub at a corporate level, they were not in a position to ‘recommend’. However, since I had specifically asked for their oversight, they were able to ‘not object’ to including P2P as a part of my portfolio. They did suggest that instead of a taxable account, I should consider moving some of my retirement funds there. Liquidity - non-issue! I am now slowly depleting the taxable account.

With that ‘oversight’ in place – last December, I opened an IRA at LendingClub and transferred funds from my existing IRA after liquidating some equity holdings. Since then I’ve proceeded to build upon my ‘fixed income’ portion of my portfolio which currently has a Net Average Return (NAR) of 15.13%. My target is to slowly have LendingClub holdings become 30-40% of my fixed income piece. Since my account is only 7 months old, I expect for some defaults to begin showing up – if you look, there are 3 notes between 31 and 120 days late from a total of 605. The following charts capture the current state of my holdings at LendingClub:

If you discuss peer-to-peer lending in the context of fixed income with your financial adviser, do return and comment on this post. Heck, comment even if you don't!

On my style, strategy and methodology... next time!

Close Encounters of the Statin Kind

Mono Lake from Mount Dana 13,200ft - September, '08

Earlier this year I attended a two hour session at Kaiser on prevention of strokes and heart attacks. The doctor delivering the information was quite passionate about the subject and he delivered good information to the 20 or so attendees, none of whom had had an attack but had lipid levels in the high risk bracket.

The presentation was followed by a one on one session with a team of residents. With printouts of my blog and the statistics that you have all seen in hand, I spoke with a resident. He quite appreciated that I had titrated niacin and EFA dosage to achieve the necessary results and encouraged me to stay the course. Before I left he suggested we both have the doctor review the recommendation.

In less than a minute, the presenting doctor dismissed the resident, glanced at my chart and pointed out my peak HbA1C at 6.4 (from Feb, 08) and LDL 159 (from Nov, 07) - and proceeded to prescribe 40mg/day of Lipitor suggesting that I achieve an LDL level below 100. I offered to try to achieve that level using niacin, to which he said, "You'll have to take 7 gms/day to get to those levels."

"Great, I'm happy to do that!" I said, causing him discernible aggravation. 

"No, you should treat yourself as a diabetic and aggressively take Lipitor to bring your LDL down below 100. If you want, you can start with 20mg/day." he said. 

"What's the smallest Lipitor tablet?" I asked and with a little more discussion and I negotiated him down to 10mg/day. With prescription entered on the system, I left.

I emailed my primary care physician, reviewed the interaction and right away he had the Lipitor prescription canceled and encouraged me to continue with my regimen.

Statin mongers are everywhere - if you've experienced an episode, statin is a blessing so that lipids can be quickly controlled. You must follow your doctor's recommendation. If however, you've caught the symptoms early, get on the diet + exercise + EFA + niacin regimen in consultation with your physician to avoid having an episode before you start on a statin regimen - give yourself a chance. You can always fall back on statins.

As corroboration that this statin-free regimen works, look at a good friend's lipid chart below. His numbers are heading the right way after only 4 months on the diet-exercise-EFA-niacin regimen! It works!!

Final word: get a handle on your lipid statistics - get tested every six months, more frequently (every 3 months) if your plan will allow it, especially when getting started. Getting blind-sided thinking all is well when it really isn't would not be a good outcome.