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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Well, it’s official. Yahoo! has blown the deal with Microsoft. Yesterday afternoon before the official announcement was made, it was obvious that the cat was already out of the bag. Many stories began to break about the deal falling through, and Yahoo! shares dropped over 10%. The stock value had topped at around $30 in the middle of February. Since then, Jerry Yang and the rest of the Yahoo! leadership have managed to wipe nearly $9 billion in market value, as it became more and more apparent the deal wasn’t going to happen.

I have no doubt that the class action suits will continue and there will most certainly be more to come. Unfortunately, I do not believe anything good can come of them, as the damage has already been done. It may be a very long time before Yahoo! ever reaches $30 again, unless they can actually make good on the promises that were made in March.

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TechCrunch has an article about a new p2p student lending site called GreenNote. In addition to facing many of the same challenges that await Fynanz, GreenNote will have additional obstacles to overcome in order to attract investors. Perhaps the biggest challenge is that the interest rate is not set by lender bidding and is fixed across all loans (currently 6.8%, the rate of a Federal Unsubsidized Stafford Loan). Not only will GreenNote have a hard time competing with Fynanz in terms of the potential returns for investors, but Fynanz also provides some protection against defaults by guaranteeing at least 50% of the principal on defaulted loans. GreenNote provides no such guarantee.

Given that they do offer a very good interest rate for students, they will surely have no problems attracting borrowers. However, I think GreenNote has a long road ahead if they intend to attract enough investors in order to meet the demand. Unless they can eventually insure part of the loan principal as Fynanz does or provide a secondary market for liquidity, I have serious doubts as to whether they will be able to compete with Fynanz and survive the long road to profitability.

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This weekend Microsoft withdrew their bid to buy out Yahoo! for $31/share. They reportedly look the offer as high as $33/share, but Yahoo! was looking to get $37/share. Now in premarket trading, Yahoo! shares are down over 20% at around $22/share. I think it was a good move on Microsoft’s part. Rather than pay the $31/share that they were offering or the $37/share that Yahoo! wanted, Microsoft can now perform a hostile takeover for nearly 70 cents on the dollar on their original offer (60 cents on the dollar of what Yahoo! was asking). It’s just another twist in the ongoing saga between Yahoo! and Microsoft.

Microsoft will likely lay low for a while now to see if Yahoo! will come crawling back as they lose billions in market value. It will also allow some time for the share price to fall and stabilize a bit before they begin the hostile takeover. There is also a lot of talk that Yahoo! will take a poison pill by allowing current shareholders to purchase new issues and thus diluting shares (and effectively lowering the stock price). I think this is an extremely poor tactic and undermines the whole purpose of investing in public companies. It is also possible that Microsoft will never pursue a hostile takeover for this reason. Either way, the Yahoo! board of directors needs to be prepared for another barrage of class action lawsuits.

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I finally downloaded and tried out Greasemonkey for Firefox extension the other day. I had heard of it before, but never installed it until recently. Greasemonkey is a Firefox extension that allows you to manipulate any web page you visit in Firefox. It uses JavaScript code that runs as if it were embedded into the website. It also provides some additional functions that let you do magical things such as cross-site scripting (which can also be dangerous if you install a malicious script). I actually had written a few JavaScript “bookmarks” to do some quick stuff for me on the Prosper website, but Greasemonkey provides a much better interface. It allows me to do what my bookmarks were doing and even more. Here are the features I’ve put into the script so far:

• Auto-login

This is disabled by default. In order to enable it, right-click on the monkey, and click “Disable Automatic Login” under the User Script Commands. When the prompt appears asking if you want to disable the auto-login, click Cancel and it will enable the automatic login. I realize this probably isn’t the most intuitive thing in the world, but I was too lazy to develop my own dialog and I just used the window.confirm() JavaScript method. Your username and password is stored locally within your browser and is not transmitted anywhere other than to the Prosper website.

I assure you that that the auto-login feature does nothing evil. I have it disabled by default in case you don’t believe me. Your username and password will be stored as configuration values within Firefox. If you navigate to about:config in the browser, you’ll see them under greasemonkey.scriptvals. Please note that the password is not encrypted. If you’re using a public machine or someone else’s computer, you may want to think twice about using the auto-login feature.

• Total Revolving Credit and Total Available Credit

If there is more than 0% utilization, then the calculated total revolving credit and total available credit is displayed. If utilization is 0%, it is displayed as Indeterminate.

• Estimations on Listing and Search pages

The estimated loss, adjustments, fees, and estimated return will be displayed on listing pages. On search pages, I display just the estimated return and estimated loss (to take up a bit less space than displaying all 4 numbers). You will need to be logged in for this feature to work.

If you’d like to try it out, first install Greasemonkey on Firefox. Then click the button below to install:

If you have any suggestions for new features to add, please feel free to let me know and I’ll be glad to see what I can do to accomodate.

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Update: I’ve added a user script command called “Set Investment Preferences.” It allows you to specify a minimum desired return, bid amount, and maximum loss amount. When you run searches, as the estimates are loaded in, listings will be removed if they are below the minimum desired return or if they have an estimated loss higher than the max loss.

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As I was writing my Rule of 72 on Prosper article for the official Prosper Blog, I began to think about developing my own ROI calculation based on what I had written. I had attempted creating an ROI calculation once before that was based on actual payments received, but I became frustrated with the lack of the detail payment data in the LoanPerformance table of the private export. I took another crack at developing an ROI calculation based on actual payments, and think I’ve come up with something that’s reasonable. If you’re interested in the actual implementation, you may want to check out the technical details and link to the SQL code here:

http://wealthboy.com/wbsroi-technical-details/

Once I’ve constructed the tables necessary to calculate the payments that a lender has received, I have all of the information necessary to calculate the WealthBoy Strict ROI. The WBSROI performs two return calculations: TotalROI and AnnualizedROI. The TotalROI calculation is calculated by dividing the total profit (interest less servicing fees) by the total amount invested (which excludes reinvested loans). The calculation does not take into account the declining balances, hence the “strict” designation. If you have been lending successfully for a long time, it is certainly possible to have a TotalROI more than 100%. Here is the formula in a nutshell:

TotalROI = (Total Interest Received - Fees - Losses on Defaults) / (Total Loan Originations - Reinvested Loans)

The AnnualizedROI is calculated by dividing the TotalROI by the weighted average loan age and multiplying by 12. The weight for each bid is the amount lent as a percentage of the total originations. This may not be the best way to perform the AnnualizedROI calculation, but it was the best I could come up with. I believe the TotalROI is relatively indisputable, barring the errors in the payment calculations. The AnnualizedROI could probably use some enhancements.

I like the idea of having a strict ROI calculation that doesn’t account for the declining balances. Many lenders on Prosper may not even be aware of what a declining balance is. Others may know about declining balances, but they just want to know what kind of return they’ve received on the total amount they’ve invested. That is what the WealthBoy Strict ROI attempts to do, and I believe it does it reasonably well. If you are reinvesting loans, your strict ROI should be reasonably close to your average interest rate less fees and your default rate.

So what about late loans? Why aren’t they part of the calculation? Well, one of the nice things about of my calculation is that it really doesn’t take much more effort to account for the probability of late loans eventually defaulting. With the information provided in the calculation, you know the total investment and you know the total profit. All you need to do to account for late loans is to incorporate the loss estimation into the profit and presto! You have your new ROI including the probability of late loans defaulting.

I decided to exclude any default projections from the initial announcement of my ROI calculation. Although it probably wouldn’t take much more effort to incorporate it, I think there is something to be said for an ROI calculation that doesn’t make any kind of suppositions. The WealthBoy Strict ROI calculates how much went in and how much came out. It makes no assumptions about the future value of loans. I have left it to others to make whatever assumptions they wish to make about estimating defaults.

I do realize that not everyone has the expertise and/or resources to put together a Microsoft SQL Server database for analyzing Prosper data. Unfortunately, I don’t have a web application connected to my database so that people can see their WBSROI. If you would like me to provide you with your WBSROI, just post your screen name into a comment here. I’ll post the data in a responding comment. If I become overwhelmed with responses to the post, I may not be able to respond to requests any longer. If it does become a popular metric, perhaps someone with a popular stats site may be willing to add my calculations to their site. Here is what the WBSROI on my account looks like:

Screen Name:WealthBoy
Total Bid Count: 45
Total Reinvested Bids: 3
Total Originations (total amount loaned): $2,250
Total Investment (total amount loaned excluding reinvested bids): $2,100
Total Income (total principal and interest less fees): $209.22
Total Profit (total interest less fees and defaults): $60.53
Total ROI: 2.88%
Average Loan Age: 1.76 months
Annualized ROI: 19.62%

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Who is to Blame for the Credit Crunch?

Yesterday I saw an interesting poll on Yahoo! Finance that asked, “With the stock market showing renewed strength is it safe to buy?” As of now, the results are as follows:

Yes. We’ve bottomed.	28%
Stocks will trade sideways.	30%
No. This is a head-fake.	42%

64410 Votes to date

It is rare for me to be in the majority, but I agree that this indeed is a head fake. It is a relatively well known fact that the biggest one-day gains in the stock market tend to happen during bear markets. It would seem the majority participating in the poll are either aware of this fact or are aware that the economy is still in a relatively poor state. I think as the year progresses, there will be economic reports that indicate the economy is either stalling or falling. I think there will be more pain to come in the stock markets.

Is there anything you can do to protect yourself? One thing you can do is buy put options to hedge against losses in any long positions you have. The problem is that everyone else is doing this as well, and it is driving up option prices/implied volatility. Just take a look at the chart for the VIX (CBOE Volatility Index) since October of last year, when the market indices reached all-time highs.

That means you will be paying a lot for any “stock insurance policies” as I like to call them, which will effectively lower your returns. If you’re in it for the long haul and you’re feeling bearish, you could always write covered calls and receive some income to help dampen any potential losses. Now would also be a good time to write covered calls because implied volatility is on the rise, which means you can receive bigger premiums. Of course, if I’m wrong and the markets do continue the upward trend, you could potentially be limiting your gains by writing covered calls.

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Techcrunch has an article today about a new peer-to-peer lender for student loans called Fynanz. According to the lender FAQ, they will guarantee 50-100% of the loan if the borrower defaults. There are a few reasons why I have my doubts that Fynanz will work:

• Interest rates on student loans tend to be pretty low. It will be difficult to attract students to Fynanz, when they can just get a traditional student loan at a lower interest rate.
• If the rates do get bid down low enough to compete with traditional student loans, the rates may not be high enough to attract investors, even if a minimum of 50% of the principal is guaranteed.
• As with traditional student loans, the term of the loans are long. At a glance, I looked at some of the loans and I saw them ranging from 10-20 years. This is an extraordinarily long time for an investor to lock up money in an illiquid investment. They will need to eventually provide a secondary market to provide liquidity, otherwise they will most certainly be doomed to the deadpool.
• As with traditional student loans, borrowers have the option to defer payments. Many investors won’t like the idea of waiting for up to several years before receiving their first payment.

Time will tell if Fynanz will survive, and I will certainly be watching with great interest.

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Today Yahoo! announced that they filed an investor presentation which details the company’s three-year financial plan and strategic initiatives. If you ask me, it is simply a meager attempt to raise the stock price so that Yahoo! can justify the denial of Microsoft’s bid to buy them out for $31 a share. It does appear to have had some effect, as the stock is up to around $27.25 which is about a 5.4% increase over yesterday’s close. However, the entire NASDAQ is up over 3% today, so much of that 5.4% increase is a result from today’s overall market sentiment. Yahoo! is still down over 9% from the high it reached shortly after Microsoft made the buyout offer. Yahoo!’s stock price still has to make up considerable ground (over a 13% from the current price) to even reach Microsoft’s bid price, let alone reach some value considerably beyond that.

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I met with my friend’s wife this weekend to learn more about her thriving real estate business. She helped to confirm what I suspected to be the number one mistake that new investors make: they expect to make good returns by paying “retail” prices for real estate. By “retail” prices, I mean that they pay the same price for a property as someone would pay for their primary residence. It is very difficult (if not impossible) to make money in real estate by paying fair market value for investment properties, especially in today’s real estate market.

The real estate business is very much like any other in many ways. If you are buying and selling widgets on eBay and you buy your widgets for retail price at Wal-Mart, there is no way in hell you are going to make any money. You have to buy your widgets at a heavily discounted price in order to turn a profit. The same goes for real estate. If you are going to make money in real estate, you have to buy properties at a heavily discounted price.

Even if you use the cheapest kind of financing possible (i.e. an interest-only loan), it would still be difficult to make positive cash flow on a rental property. It would also be difficult to try to make upgrades to the property to sell it for a profit, if you paid fair market value for the property. The closing costs, holding costs, not to mention the cost of upgrades and repairs would erode your profit. Even if you paid cash for the property, it is may still be difficult to simply recover upgrade costs unless you made a major improvement such as adding a bedroom and/or bathroom.

The best way to mitigate risk when investing real estate is to make sure you pay as little as possible for investment properties. I’m talking about paying 65-70% on the dollar or less, not a discount of a mere 5-10% of fair market value. The less you pay, the more room for profit it will give you for recovering closing costs, holding costs, and the cost of repairing and upgrading the property. It also leaves room for positive cash flow if you plan on buying, holding, and renting (which is what my friend’s wife does). If you do ever decide to take the plunge and get into investing in real estate, be sure you are getting a steal on the properties you buy. Otherwise, you could very likely have a bad experience and will never invest in real estate ever again.

Of course, the big secret is how can you possibly manage to buy a home for 65% on the dollar. Perhaps that will be another article for another time, but there are many books and resources on the internet that will tell you how to do it. It is a matter of doing your research and acting on what you’ve learned. The biggest challenge (especially for an analytical person such as myself) is actually taking action after becoming educated with good information.

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