With the recent run-up in fuel prices, you have likely been seeing prices rise in your grocery store too. This weekend, I went with my wife to buy our produce. She first asked me to stop at the ATM to get $20. Going to the ATM is unusual for us in the first place, because we use cash back credit cards for everything and rarely carry cash at all. After picking up our yuppie food stamp (the ubiquitous $20 bills spewed out of ATMs everywhere, often used when trying to split the bill after a meal), we went to our local farmer’s market.

The farmer’s market is an unusual and wondrous place. There are customers and vendors from all over and you hear all sorts of different languages, not just Spanish and English (we live in Florida, so hearing folks speak Spanish is somewhat commonplace). Prices are rarely listed and normally customers just inquire or vendors will volunteer pricing information. It’s fascinating and rare to see such a pure and free market. You can even haggle if you so desire, although the prices are so low you really don’t need to.

Indeed we were able to purchase all our produce for a single $20 bill. The merchandise we walked away with would have easily cost us more than double at the grocery market. Not only are the prices much better, but everything is fresh too. The only drawback is that because everything is fresh, you won’t find items that are out of season (for instance, strawberries). Unfortunately, you will still have to purchase out-of-season items from your grocer. However, you should still be able to find the majority of your produce at the farmer’s market. If you like to save money and enjoy people watching, you should definitely try visiting your local farmer’s market.

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I’ve been lending on Prosper for a bit over 7 months now. I’ve seen quite a few loans move in and out of late status. I suppose some borrowers prefer to “optimize their cash flow” by allowing their loan payments to lapse a few days. This is just fine with me, as long as they eventually make the payments. Unfortunately, I also have some other borrowers that have allowed their payments to lapse more than just a few days and I currently have four loans in collections. Here’s a summary of my earnings on Prosper so far:

• Cash deposited into account: $2,500
• Earnings from referrals: $50
• Principal Loaned: $3,000 (includes reinvested principal received and referral bonuses invested)
• Principal Received: $376.45
• Interest Received: $219.78
• Late Fees Received: $0.70
• Servicing Fees Paid: -$10.23
• Collection Fees Paid: -$0.24
• Net Profit: $210.01

Now of course, there is a high probability that at least one of my four loans in collections is going to default if not all of them. The net principal balance for the four loans in collections is $191.61, so even if all four loans defaulted, taking into account my net profit I’m still ahead of the game by $18.40. That’s about a 0.74% total return so far or about 1.1% annualized. Although EricsCC and LendingStats have my estimated ROI much higher than that, I prefer to take a more conservative approach. Warren Buffett’s first rule of investing (and mine too) is don’t lose money. So far I think I’m doing well in that regard on Prosper.

I still think that Prosper is a good investment vehicle, and a good addition to any investment portfolio. As long as you can outpace your defaults with your average interest rates, you can make money investing in Prosper loans. Here are a few simple rules I try to stick by when I’m investing in prosper loans:

• Don’t invest in charity cases. I’m investing my money not giving it to charity. If you do lend to someone in a charity case, don’t get mad if and when you lose your money.
• Don’t invest in start-ups. Without proven results, investing in a start-up is more of a gamble than an investment.
• Don’t lend for working capital. If someone needs money for working capital it typically means they do not have the positive cash flow necessary to run their operation.
• Invest in those consolidating debt. These are my favorite kinds of loans, particularly if it will improve someone’s cash flow situation.
• Draw a line in the sand as far as your minimum interest rate. For example, if your target rate of return is 7%, then you shouldn’t invest in loans at a rate any lower than 7%.

I haven’t always followed these rules, but it is because I hadn’t yet formulated them in my mind. If ever I do break any of the rules now, I need a very good reason for doing so. If you’re dealing with a small portfolio (less than 100 loans), it’s easy to stick to these rules. If you’re dealing with a larger amount of money and a higher number of loans, you’ll probably want to use a portfolio plan. Either way, you should try to be as consistent as possible with your loan selection in your lending portfolio.

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