Wednesday, November 16, 2011

Fourth Month and Seven Deadbeats

(See other Monthly Status Updates)

Well, I knew this day would come. I have had seven notes that have gone past the Grace Period into the Late Period. Lending Club states that those within the Grace Period, I have an 83% chance of getting some money back from. Those that are Late 16 to 30 days, 75% chance of getting some money back. Late 31-120 days yields 55% chance. Note that this does not state that you will get all your money back, but get some back.

I'm changing my pricing strategy a little. Any notes in the Grace Period, I am now selling for Principal + Interest. This means I could lose up to 7 days of interest if it sells on the seventh day from when I put it up, but given that there is a 17% chance I could lose the entire note, it's little to give up. Then when a note goes Late, I start decreasing it's sales price by $0.10/day.

Of the 7 notes that have gone into Late, I've sold one so far. This is my first chance to get real data (although not enough for statistical significance) as to who defaults. Of the six notes I still own that are Late here is the info (notice that I bought all of these notes right before they stopped making payments):

Months OldPayments MadeLatest Action
42Voicemail left
74Collections Agency attempted to contact
75Borrower provided Bankruptcy counsel information
86Borrower filed for Chapter 7 Bankruptcy
118Drafting lawsuit
1816Sent email to borrower

We'll see how this plays out as far as collections. However, I'm still optimistic. My account is currently worth 5.1% more than the money I put in. On notes I sell, I get a median return of 38.5%. On average I sell notes after holding them for two weeks. The notes in my portfolio I've held for an average of 40 days. So it looks like my strategy holds on to some notes and cycles through others.

I've been bouncing around between 99% and 100% for my investor percentile. We'll see how that pans out over the next several months as we see what happens with these Late notes. Currently, I'm guessing I'm really in the 99.5% and the rounding gets me to 99% or 100% depending on the day.

The main thing I've been focusing on is keeping my time to a minimum on handling my account. My routine is to spend about 5 to 10 minutes a day each morning buying and selling notes.

Lending Club reports that I have a return of 21.22% (average is 9.64%). I think my Late notes will affect this, but I'm hoping my Grace Period and Late note selling strategy will minimum the impact on my return.

I'm still a small investor. I am over the 100+ Note range but not quite to the 400+ Note range. Of the 100+ Note investors, if I can stay in the top 6.5% of investors, I will still have a 15%+ return. My target is 16% per year, so 21.22% gives me some wiggle room.

So I think the changes to my strategy will be to:

#1 Do not buy notes that are in Grace Period
#2 Sell notes that reach Grace Period at value
#3 Discount Late notes by $0.10/day

This is where it gets really fun, how to mitigate risk and still make a good return. When I said I've been lucky so far, this is where we see what the real possibilities of Lending Club are.


  1. I've noticed you refer to your return based on what LendingClub states, yet you buy/sell on FolioFN. Do you have a sense of what your true return is (factoring in the markup/down of your buys/sells)?

  2. Chris,

    Excellent question. As an investor I should be figuring out my real Cash-on-Cash-Return on a regular basis. I have it planned for my tool, just haven't gotten to it yet.

    However, I can give you some numbers that will help you get a feel for how close LendingClub stats are to real returns, even with FolioFN activity.

    I've had money in my account for four months now. I started out with some play money and then added about 5x to it later. I also keep streaming little bits of money into the account. I currently have 5.5% more money I've paid for notes than I've put into the account. If you assume I put all the money in at the beginning, and you just add the 5.5%'s, you'd have a low-ball yearly return of 16.5%.

    I've sold more notes than I currently hold. Of the notes I've sold, I have an annualized average return over 1,000%. However, since many of those were held for just a day, I prefer to look at the median return on sold notes, which is 40% annualized return. If you look at the annualized return of the notes I've sold weighted by days held (the more days held, the more weight it's given in the average), my day-weighted-anualized return is 228%.

    What I need to do is determine my average daily return, and then annualize that. When I get that written into my tool, I'll post it. Until then, the ~20% return quoted by LendingClub seems about right.