As many of you, I am wasting dedicating lot of time these days watching charts about the evolution of the virus in many countries. My parents live in Italy, in the hardest hit part of the country, so I have an obvious interest there. I also watch Italy because I think it will give me a roadmap on how the situation will evolve here in UK, since the Covid-19 arrived some weeks in advance compared to London. Italy, UK, Europe in general and then the US, because if they solve it there, 80% of stock-related issues will disappear: yes, it is not the most politically correct thought but it is the reality we live in, not liking it does not make it less real.
Watching the graphs, looking for turning points, I asked myself, does it not remind me of something?
I started investing with Bondora in 2015 and after the initial honeymoon period driven by their proprietary loan losses accounting rules (hide them until you cannot), I have tried to steer my portfolio to long term profitability. You can read about my strategy here. How is going? Well, I think I am close to a turning point.
Net Interest Received represents loan interests minus accrued loan defaults. My first strategy, using Portfolio Manager was a losing one: Bondora was investing in too many non performing loans and the more returns were going down, the more Bondora was buying low rated loans to try to play catch up with their target return. If you look at the returns in 2015 and 2016 this is not evident at all, on the contrary you will assume the portfolio is doing great. This is because there is a big temporal lag between the implementation of the investment strategy and the moment you see the real returns of the same strategy, even bigger considering Bondora accounting system.
Like non performing loan in my portfolio, Covid-19 spread silently around the world (well Europe, because no one gave a damn while people were dying in China); Governments initially did not take any measure because people were getting sick without symptoms and, more importantly, without deaths. Luckily for us, virus symptoms are faster to show up than non performing loans but you get the idea.
After the initial phase, measures were taken but the effects of those measures would be visible only later. There is a period of time, not even well defined, when you can only guess if you did the right thing. On Bondora, I first moved from Portfolio Manager to Portfolio Pro, excluding Spain and F or below credit ratings. It took me years to realise the adjustments I took were not drastic enough, the portfolio was still generating losses but there was no way for me to know it faster.
In London we passed from herd immunity theory to elderly lockdown, then a soft lockdown, then a hard lockdown (and God knows if we will be stripped of the possibility to even run outside in future days). On Bondora, I excluded Finnish loans, then E rated loans, then passed to invest only on the secondary market in loans that at least paid the first 3 instalments.
As you can see, red bars representing very late loans (defaulted by any means other than Bondora method) started to diminish; do not look at the latest months, because by definition bad loans did not have enough time to show up, even if they are there. On the other side, net interest, which are real cash flows and cannot be tricked by Bondora, started to cover more and more defaulted loan losses: peak losses seems to have passed. It is clearly too early to declare victory but at least I am more confident in the future.
The trick in investing, and also managing a pandemic as we learned these days, is that you do not have an immediate feedback loop regarding the action you take a time 0; everything is also complicated by the fact that your results can be influenced as well by actions that are outside your domain of actions. What if Bondora finally fix its credit model and start to lend only to creditworthy borrowers? What if they lax their model even more because they care only about the commissions they get when they originate a loan? Governments can put population in lock down, but what happens if too many people do not stay at home? What if you do not wash your hands?
Hopefully we will be able to go out and have a normal-er life before a vaccin is developed, but despite the numerous newspapers and MPs that will tell you after the fact that this or that measure worked or did not, the reality is that no one will ever know for sure. It is the same when I read posts where people comment their success on Bondora, saying it was already clear years ago when they started that only a certain subset Estonian loans will perform.
Bonus reading
Recently I stumbled on this post and…sorry, I cannot refrain to call it out, especially because it is coming from someone that seems to be quite known in the community. I do not speak German, so there might be the chance that some nuances are lost in how Google translates it.
In many groups, I see the corona herd instinct that investors sell P2P loans to convert this capital into shares. Even some bloggers follow this call. That is exactly what I do NOT do! Why? Well, P2P loans were never a cash parking lot for me, but an investment.
Let’s assume that an investor current p2p portfolio value is what is shown on each platform, which as said above is not because the defaults are there but simply you do not know them yet. If you started the year with a 50/50 split between shares and p2p, if the value of shares goes down 30%, now your portfolio is 41% stocks, 59% p2p. You sell p2p and buy stocks simply to go back to your starting target allocation, not because you consider p2p as a temporary investment. In alternative, others may now think that the risk/reward profile of stock is better than before, given the lower valuation, while you can sell p2p to investors who, like someone, did not see any loss yet and think the asset class is unscathed.
The basic assumption has always been that these do not correlate so strongly with the stock market in the event of a crisis.
Sorry but your assumption is wrong. Stocks and p2p loans ARE correlated. Look at Iute Credit bond, an issuer on Mintos: it was trading at par (100) in February and now it is down to 80. Look at p2p secondary markets where investors sell their holdings at 30% discount: that is the same price you would get if you want your cash now. The two looks pretty correlated to me.
Lars has the same blindness that affects Private Equity investors: since the asset is not mark to market, then its value did not move. Wrong… He then proceeds with the big mistake: posting stocks returns vs p2p returns. P2p returns show the past, what it HAD been, obviously they did not move because the effect of what happens today will appear in months. Stock prices are forward looking, they tell you what the market expects the future to be, while p2p returns tell what it had been. In fact, if you want to sell a stock at screen price, the buyer is right there, you can convert stocks into cash instantly at that price. Try to sell your p2p portfolio at the implied return you pictured, you cannot. You will not find anyone to buy your position at that price, and this is the reason why it is wrong. What is the correct price? Look at each platform secondary market, where it exist.
I do not like to point to certain P2P platforms here, because I know about my reach and also that investors may leave it in panic. That will confirm my forecast, but it doesn’t help the P2P platform.
I always wondered who will be the Meredith Whitney of p2p industry, now I know.
Loans from countries that are not affected by the corona virus
Like…Syria? Countries that are not affected are countries that are too poor or too stupid not to test their citizens; the virus is there, they simply do not report or see it. I agree there will be different impacts on different states but if you tell me that you know now which those countries will be in one year time, I would take the under on that bet.
What I am reading now:
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