Monday, December 5, 2011

'Tis The Season, I Hope

 The first three months were great: August, September and October. Since then, I've had 12 loans go late. One was sold, the remaining 11 I still have (not by choice).

My thoughts right now are that as soon as a note goes into Grace Period, it's time to start discounting it. I was just giving a mild discount (Principal + Interest rounded down to the nearest dollar). This led to three more notes going late. I am now going to 80% below P + I for any notes that goes into Grace Period. This is based on the recovery rate from the chart below.

I still discount 16 - 30 day late notes 75% and 31 - 120 day late notes 50%. Grace Period, Late 16 - 30 and Late 31 - 120 I drop in price $0.10/day ($0.60/week). It may be that I've been once bitten, twice shy, but I'll find a happy medium as I experiment with discounting.

I'm hoping that it is the end-of-year season that is causing the larger number of Grace Period and Late notes, or at least due to fluctuations in the economy.

What I'd really like to see is someone blogging about their experience in taking discounted E, F and G Grace Period or Late notes and making some nice returns from those. If everyone followed the advice I post, no one would be there to pick up the notes I don't want anymore.


  1. I can't believe how many of your late loans have made absolutely no payments! Do you think these borrowers intended to take the money and run, so to speak? Have any of them declared bankruptcy? All of these loans are 5 year terms except one. Do you specifically prefer investing in the 5 year notes over the 3 year notes?

  2. I cannot know what their intentions were. It may be they were on the brink of bankruptcy and used it as a last ditch for cash. Several have provided bankruptcy information. Some have "disappeared" (and lending club used a service to track them down, and found at least one).

    I don't intentionally prefer investing in 5 year notes, it just turns out they generally have the highest potential return (at least in theory).

  3. @veggievet, also, remember that they never paid *me*. Every one of them had made a payment of some kind, they just haven't paid since I picked up the note. Given that I've cycled through hundreds of notes (and haven't, until recently, tried to sell Grace Period notes) the few Lates I've gotten aren't that bad. Now I am attempting to mitigate the risks. I'm hoping the the large number of defaults is due to a seasonal shift. It may be that I need to adjust my strategy so that end of the year I get more conservative. I haven't been investing long enough to know if it holds true, but we'll see.

  4. Thanks, Marc. Your returns have been nothing short of spectacular. How much time do you spend monitoring your notes per day? How long do you typically hold a note?

  5. @veggievet, I spend about 10 minutes a day (sometimes less) doing account maintenance, six days a week, so an hour a week. The notes I've sold I've held for an average of 15 days. The notes I currently hold, I've held for an average of 50 days. I buy a lot of notes only looking at potential return and not looking any deeper. I then sell the ones that don't look quite as good under the surface for a 16% annualized gain.

    Actually it's a bit more sophisticated than that. I grade all the notes I have on a scale of 1.0 to 2.0. I then multiply their score by 16%. The worst note I hold I sell for 16% annualized gain (this takes into account how long I've held the note, assuming the note doesn't sell for 7 days, taxes and fees).

    Basically I discount notes I'm not keen on keeping and I put a premium on notes I'd like to keep. My median annualized return on notes I've sold is 37% (although it is falling somewhat due to my change in Grace Period note strategy)