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Guest Post: Statistics and Emotions in Selling Lending Club Notes



This blog post is written by Carl, a PeerCube user. We met Carl at LendIt conference in San Francisco. Soon after, he became a trusted advisor with his thoughtful comments and suggestions. We have been appreciating his feedback stemmed from his rich life and investment experiences. Without further ado, let’s find out what Carl has to say.


Using Statistics

Lending Club and PeerCube provide a potent cocktail of statistics to help the investor make better investment decisions. Lending Club provides the probabilities of grace period/delinquent loans descending into charge off. PeerCube has “tons” of FICO data predicting the probability of charge off. In tandem, Lending Club and PerCube are an extremely valuable resource– IF you can deal with your emotions.

An example: If a loan has no late payments and fifteen consecutive on time payments how would you deal with a FICO drop of 105? PeerCube says the loan now has a 50% probability of ending up as a charge off. “Conventional” wisdom states that you should wait until the loan is in grace period before selling on FOLIOfn secondary market for Lending Club notes. Follow that advice at your peril! When a loan is in grace period potential buyers will demand a significant price discount. Better to sell the loan when it is still current and accept a lesser discount than wait and take a more severe hit later.

Overcoming Emotions

The question is “Can you overcome the natural tendency to hang in there?” Are you capable of selling a note that has never been late and has a record of fifteen consecutive on time payments for a discount of as much as 25%? You must consider that the loan has a 50% probability of eventual charge off.

Human behavior is consistent across all investment classes. We are reluctant to sell a stock even though its price action shows significant deterioration. We hope the price will improve. We don’t want to admit our mistake. Similarly in the above example we hope that this FICO will recover. The investor should sell when FICO alarm statistics tells us to get out!

Buyer Perspective

Now what if you are a buyer on FOLIOfn? You should incorporate Lending Club/PeerCube statistics in your decision making. If a note displays a grace period or two but is now current– yet has a history of a steady FICO score that is now accelerating, shouldn’t you consider purchasing the note at a significant discount?


Carl mentioned above the Portfolio Notes at FICO Risk feature available at PeerCube. We implemented this feature after the analysis on FICO score trends and loan performance believing it would be a useful tool for our users. This feature tracks your Lending Club notes and identifies borrower’s FICO score drop after notes are issued. Give it a try especially if you are an active investor on the FOLIOfn secondary market.

Comments: (4)

JJ Hendricks | Tuesday August 5, 2014, 10:59 am
Emotion is probably the single worst enemy of any type of investing. Basing decisions on objective measures like FICO instead of subjective things is a good way to reduce emotion. Reading articles like this are a good reminder of this. Thanks
Anil Gupta | Tuesday August 5, 2014, 10:06 pm
JJ, thanks for liking the guest post. I agree emotions always come in the way of making logical decisions.
Hrant | Thursday August 7, 2014, 9:10 pm
Congrats Anil for another well written article, and stats. In investing, one of the most important points is not to be emotional, yet harvest the power of true statistics to ones' advantage. Perhaps you can somehow transform the info you have to set up a buy/sell signal for each loan for your readers, eventually monetizing the info for your profit, after all, the info is crunches via computer, and stats apply to each and every note compiled. I know I would be very interested in outcomes of behavior, and would be interested in investing/divesting based on stats over longer periods of time. Perhaps you can start your own small fund...w/a minimal cost, and low minimums, w/no/a month lock ups. I will be your first investor:) Keep up the great work, as always!
Anil Gupta | Thursday August 7, 2014, 9:44 pm

Hrant,

Thanks the complement. Credit for the article goes to Carl. Thanks for the suggestion on generating buy/sell signal, monetizing the info, and setting up fund.

Actually, there are several 'donor exclusive' features on PeerCube that help lenders decided whether their notes are turning into lemon. Just today, I released an experimental donor exclusive feature Portfolio Alert. Hopefully, users will point out how this feature will help them or changes needed to make it more effective. I am also working on rolling out subscription based service for retail lenders and institutional lenders.

Setting up a small fund is an interesting idea. I wish I had some background in operating and managing a fund. I believe building strategy and making buy/sell decisions is a small portion of operating a fund compared to marketing, raising investment, and reporting. If you know someone with such a background, I will be happy to collaborate with them to explore setting up a fund. Let me know if you know someone or institution that might want to manage a small fund focused on consumer and business lending.

Thanks for the comment.

Anil

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