As an allocator, I always challenge consultants that model assets like Absolute Return Credit: they give me an expected return and volatility profile based on average results of managers in the space without considering that you can invest in one, maybe two managers: your final result depends on your capacity to select the right manager(s), not on the asset class itself (usually those averages are also wrong because they do not take into account survivorship bias).
You can find plenty of articles on how the average person is coping with lockdowns but you will never find a real person how lived exactly that experience. Every one is pissed but some have more reasons than others, if you take a closer look. The easier mistake is projecting your experience onto others, we are under the same rules and yet…as Drake said
We walk the same path, but got on different shoes Live in the same building, but we got different views
Ask your friends why they are pissed and I bet you will collect a lot of different stories: singles, married or parents, fired, working from home or furloughed, high risk or low risk. No one check all the same boxes.
Sterling at p2p-millionaire.com was back blogging recently. I find the way he shows his portfolio return quite telling: we all invest in p2p and yet I bet few of us can report the same results (except those poor naïve lads that started less than a year ago: congrats, you just completed 3k in a 42k marathon, I am so not interested in the lessons you learned so far).
The €10k Club
Going to go out on limb here, I am not that part of the community, nor I have a particular curiosity, to know but my assumption is that the majority of p2p investors adopt the same philosophy (as I do): a diversified portfolio with some degree of due diligence.
Again, ideally I would have chosen an example with a longer history, yet for me Sterling experiment is telling in how a default (or more than one) can change your experience. Yes, there were some examples out there that were easy to spot as scams but if you think that you will certainly have a clean sheet after 5 years investing in this space, I will take the over. I use Sterling example because I think he has a very good process, definitely better than mine, but still was not default-immune. Based on when the default occurs, you can sit with an overall gain or loss and this will definitely have an impact on your opinion on this asset class.
I am sure Crowdestor and Bondora will bust (as I wrote many times) but if I am wrong, I would have left chips on the table: calling a bad investment has an opportunity cost as well (actually, not in Bondora’s case since 6.75% is without a doubt a shitty risk-adjusted return). The longer you stay invested, the longer you can benefit from compounding…but you also increase the chance of having your money involved in a platform future demise. This balancing act is hard to master, considering that you can have future probabilities right and still draw an adverse scenario. Or be blinded by luck, like some investors that insist if you invested in Bondora at the beginning, but only in Estonian loans and only in some risk categories, then you could have achieved double-digit gains like they did. Sure.
The Main Portfolio
Sterling main portfolio is a more deliberate, curated and risk concentrated version. To take this approach you need his knowledge and plenty of time, at least not the average time span that investors consider as passive investing; secondary market trading is anything but passive.
His reported XIRR is 8.1%; considering the lingering defaults detailed in his analysis, he is closer to 6.5% if we want to take a conservative approach. Remember the Nick Maggiulli post of two monts ago? His p2p analysis was admittedly quite narrow, limited to Lending Club only and yet he put returns in the 4% to 6% range.
Every experience is different, I was writing some paragraphs ago. And yet, cannot help my brain to start to see a pattern here.
I started investing in p2p, chasing the 10%+/year Holy Grail return, almost six years ago. One thing is to tell yourself that you know nothing, that shit will happen in the future, one thing is to see the VID hitting for real. I put the effort, I did the homework and I got the result I was rationally expecting but unwilling to admit to myself. To get the Holy Grail you have to be unreasonably good…or unreasonably lucky.
This year, for the first time, I started to get some profits off the p2p table and reinvest them in my traditional portfolio. If I have to die on the 6%/year return altar, I prefer to do it with the 60/40 portfolio* instead of having to worry about a random Latvian start-up.
*(60/40 is just a shortcut to refer to traditional ETFs, do not start with “but but but, bonds yields 0 now”).
What I am reading now
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P.S. I never spoke with Sterling and I am using his blog just as an example: the graphs are easy to ready and give you a quick idea of the dynamics of a p2p portfolio. While I am obviously trying to give you a portrait of my thoughts that is factually correct, there might be elements, specific to his investing, that I got wrong. For the sake of this post, I do not care and you should not either.