Thursday, October 13, 2011

Third Month and Going Strong

(See other Monthly Status Updates)

Three months down and my luck is holding. Lending Club reports that I am getting over 20% (my target minimum is 16%). This appears to put me in the top 1/2%. I say that because I've been fluctuating between top 99% percentile and 100% percentile. I think they are rounding it. I can't seem to find how many investors there are on lending club, so I'm not sure if I'm in the top 5 or top 50.

I'm still trying to figure out where the problem is with about 1/3 of the notes I sell being sold for less than 16%. Of the notes that sell for less than 16%, they all sell for 1.7% to -100% (annualized). I'm hoping it's my tool. I now review my sales to make sure that I at least ask for the principal and interest.

I may also have my first default here soon (16-30 days late).

My strategy hasn't changed. Buying: I prefer to hold notes that have just been issued or are within the first year (the earlier the better). I only buy $25 fractions. I try not to buy notes from loans from which I already have a note. I want loans that are Now Current and Never Late. Then I look for the highest Yield to Maturity. Selling: I offer all my notes for sale. I set the sales price such that with taxes, fees, payments and purchase price taken into account I would get 16% to 32% annualized return if the note sold in 7 days.

I have a formula that determines the risk of a note using 30 different criteria (which my tool grabs from the original loan information and the note information pages):

Accounts Now Delinquent Amount Requested Credit Score Change
Credit Score High Credit Score Low Debt To Income
Delinquencies (Last 2 yrs) Delinquent Amount Expected Final Payment
Fraction Grade Gross Income
Home Ownership Inquiries in the Last 6 Months Interest Rate
Issue Date Last Payment Date Late Fees Received
Length of Employment Length Monthly Payment
Months Since Last Delinquency Next Payment Date Open Credit Lines
Public Records On File Purpose Revolving Credit Balance
Revolving Line Utilization Status Total Credit Lines

The more favorable these criteria are, the closer to 32% (I want to hold the note longer). This way I lower the price on riskier notes to have them (hopefully) sell before there are problems while less risky notes are held to collect payments until they start getting in the risky category.

As you can see I mainly have F and G notes (highest Yield to Maturity) as well as mainly 5 year notes.

This mix seems to jive with Lending Club's reported Return by Credit Grade. Grade F notes get the best return generally, with Grade G being slightly behind. Grade E notes are even further behind, which may be why I only have a handful of them.

While I have over 100 notes, Lending Club doesn't know about all of them. In the "Your Investment Numbers" chart above, it reports I only have 99 notes. The rest of my notes are being held in Foliofn. It takes a business day (sometimes more) for trades to settle. So at any point I may have a half dozen to several dozen notes bought or sold and pending settlement. It is a little confusing at times having notes and cash in the Lending Club account and pending sales or purchases in Foliofn.

So apparently my strategy can, at least in the short term, put me in the top 1.35% of all those with 100+ notes. On this chart they state that it takes a minimum of $2,500 to get to 100 notes. While that is not technically true (you could buy 100 notes near the end of their term for $5 to $15 each), you probably won't get the best returns buying those notes. Remember that the early payments are mainly interest, while the last payments are mainly principal. The value in a note for sale is the principal plus the next interest payment. However, the longer term value is the principal plus all future interest.

After three months I'm still having beginners luck. I'm still getting more than twice the average return. Still no defaults (although I have about a 25% chance that one of my notes will default). Still working it.


  1. Well done Marc. Great to hear of your success. So a question I have is: you mention you have a tool you are using - can you tell a little about this tool. I am curious because I have found Folio to be challenging to say the least from a usability perspective.

  2. I've just started investing in Lending Club (investing in notes directly as opposed to the secondary market), and your blog opened my eyes to quite a few things.

    Had a question for you - when you look for the 16-32% AR after fees I assume that the selling price is higher than the principle (my calculations for my loans come out that way). What % of your notes actually sell every week?

    Thanks for all the insight.

  3. I'm trying to do my best to understand your strategy, but I'm having a hard time!
    So you're basically buying low and selling high? I'm trying to figure out how to do the same, but including the notes I fund. I just have no idea what to price them at when I sell them, I can see why you made your own tools for that.


  4. Peter, I'm hesitant to share my tool, as it is quirky and has problems. It also requires a Mac and the Safari browser. Via AppleScript I can scrape the contents of every web page Safari is looking at and get its web address. I wrote a python script that scrapes this information and builds up some databases. While I am browsing around, it dumps that same tables that are in the web browser, and adds some extra information to it.

    For instance, when I am looking for notes to buy, I set the status to Never Late, Now Current and turn off the two Late check boxes. I then sort the resultant list by Yield to Maturity. That is a pretty good list, and Folio let's me know which of those notes I am selling (little blue circle instead of a question mark). However, I'd like to know which ones I already own a note from the same loan. If the borrow defaults, I don't want two of my notes going south. Helps with diversity.

    If anyone really wants to look at my script, I will email it to them. However, I make no assurance of it's accuracy. I have sold notes for less than I bought them for without intending to. I think I have corrected this, but I do not know what else lurks in there. It's good enough for now.

  5. Chris, remember that it is an annualized rate, so if I just buy a note, when I list it for sale, taking into account taxes, sale fees, etc., the sales price may be just 1% or 2% higher than what I bought it for. The the secondary market, you can buy notes for less than their principal and interest. When I buy notes that were just issued, I do ask for more than the principal and interest.

    Buyers, however, look at the return. If I hold this note for the long term (and it doesn't go under), II could get 19% return on my money. I buy many notes than have just been issued (no payments made yet, balance is still $25). I almost always buy them for more than $25. It's the Yield to Maturity that I look for. Can I recoup the premium I paid to get this note.

    As to how many notes I sell, I'll tell you this. I have only put money in, I have not taken any money out yet, and in four months I have sold 1.5 times as many notes as I currently hold. So about every three months I figure I'll have sold roughly every note.

  6. Peter (Unknown), my thinking is not just buy low and sell high, but buy things that you wouldn't mind holding for the long term. Then offer them and if someone wants them at a price that gives you your return, all the better, lock in your return.

    I don't know how your algebra skills are, but mine were put to the test coming up with the the calculations for sell price.

    The basic formula is:

    A = P x (1 + R) ^ T


    A = Sell Price
    P = Purchase Price
    R = Return Rate (ie 0.16 = 16%)
    T = Time in years

    Of course that doesn't take into account taxes (which depend on your tax bracket) or the trading fees. Those complicate the algebra. Here is the Python code for the final formula I came up with:

    def salesPrice(investment,fee,tax,payments,years,rate):
    Sell Fee (1%) 0.01
    Tax Rate (25%) 0.25
    Duration Held (now - Purchased + 7 days)/365 fraction of year
    #print "investment",investment,"fee",fee,"tax",tax,"payments",payments,"years",years,"rate",rate
    sell=( ( investment * (pow(1 + rate, years) - tax) ) - payments ) / (1 - fee) / (1 - tax)
    #print "sell",sell
    return sell