Kristaps Mors sent me three questions about my experience investing with p2p lenders that he is sharing with various p2p bloggers. The questions are simple but informative, I could only share a couple of lines with him but I thought they would also make a nice topic for a post here.
- When you started investing in P2P, what return did you expect? What is the result right now?
P2P are debt instruments, your upside is limited by each loan interest rate but your downside can be an 100% loss, if the borrower does not repay you. Since the sector is new and unregulated, you can list all the potential risks but is hard to assign reliable probabilities to them. Considering these elements, I started to invest in loans that offered at least a 10% return, so that I had a reliable (hopefully!) margin to cover all risks. Platforms that offer returns in the single digit, like Housers or Rate Setter, represented a big NO to me. After four years of experience, I started to relax a bit this rule: for example I started to invest in Funding Circle because they got funds from institutional investors like the EIB and their shares are listed, so there is bigger scrutiny on the company.
My dream was to get double-digit returns from my P2P investments. I did not create a comprehensive excel to track each platform yield so far, a small part due to laziness and a big part due to the fact that it would be psychologically demotivating to see how far I am from my unrealistic dream. I should also give each platform at least a three years track record to get a reliable figure, most likely it would take more than that…if they do not default in the meantime.
Not that I particularly care to know if I am exactly at 6.2% or 7.1%, I am in that region and so far this experiment is not a complete disappointment. The lowest returning platforms are Bondora and Fellow Finance, both around 3%; the basket case is DoFinance, the jury is still out to determine if I will ever get my money back here, the positive aspect is that in past years I withdrew part of the gains so I am not at an 100% loss.
Nick Maggiulli included P2P returns in the linked post on the best income producing assets: his analysis is based only on LendingClub data, while I consider it simplistic (there are 100 of platforms out there) I agree that in the long term returns should converge to that 6% region (here my last year post where I explain why). His conclusion is not uplifting, P2P seems to be one of the worst choices from a risk/return point of view…but it is also one of the easiest to implement.
2. If you invested in any of the shady platforms, did you notice any red flags in the beginning?
This is the other side of the coin related to platform returns: you want them high…but not too high. Why? Because there has to be a valid reason behind those returns, there has to be an explanation, a RISK you are taking to obtain those returns. Who loves to give you high returns for no risk? Scammers. That is absolutely the first red flag and the good part is that you do not need to invest to notice it.
My favourite example is movie financing on Crowdestor. A movie has an expected negative return and all gains come from those few movies that becomes blockbusters; add the fact that not even industry insiders can predict if a movie will be a success and you understand why no one finance a movie via debt. It is like VC investing, wonder why there is no VC debt fund? Same reason. This is not literally a scam, just a stupid investment…but would you be happier to know you lost all your money even if it was a legit way?
Scams are just a part of the wider group of stupid investments, the goal here is to avoid all of them. The only reason why someone is offering you a high, fixed return is either because the risk is there but you do not see it or because no one else believed in it. You should approach any investment opportunity thinking that to arrive to you it has to be dismissed by multiple other richer, better connected individuals: why they did so? Plausible reasons might include:
- the opportunity is too small for someone big/richer but not for you (this is the reason why money managers have bigger returns when they start and they manage a smaller pot of money)
- there is a regulatory reason that prevents institutional investors to access the opportunity (think about those Bitcoin funds that trade at gigantic premiums to Bitcoin itself)
Ticking above boxes does not guarantee you that you are offered a legit investment, only that your homework is starting from a good point.
3. Any lessons learned? Have you changed your investment strategy, based on last years’s events?
I did my first investment 25 years ago, I am professional investor since 17: investment vehicles, asset classes might change but my investment principles are valid for everything. The lesson here is the same: stick to your rules, do not be greedy, use common sense, read everything you can.
It is important to have a process you can live with, you cannot be greedy when things seems to go your way and then panic when the market goes upside down. You have to appreciate the role luck has when you invest, sometimes you do the right thing and you lose, other time you are wrong and still end up with money in your pocket.
I am not perfect. I stopped adding funds to EstateGuru when I hit the first default, the truth is that my sample size was too small and I should have kept adding projects. On the other side, scaling up and not go all-in from the start allowed me to control risk and get comfortable with each platform. Each investment in this space is a leap of faith, most of the time I still have the stupid conviction that whatever default/scam will happen, it will bite others but not to me. No investor has a clean sheet in their career, you are paid to take risks, it is important to take the right ones and do not confuse making a mistake with being unlucky.
Ok Boomer
Kristaps published his post days ago and I was curious to see other bloggers replies. Being old in this industry does not mean at all being right…but when I read “I started investing 3 months ago” I would like to scream SERIOUSLY?!? to the screen. Every opinion is legit, if you want to chronicle your journey from day 1, feel free to do so, my issue is more…well, Savings 4 Freedom explains it in their own word: “I stopped publishing for months trying to understand how I could be more professional and responsible in my blog posts. I would like to keep testing, reviewing, and investing in P2P platforms, but I also wanted to apologize for the manner my blog contributed to promoting scams.”
It is too easy being cocky when you start, the problem is that when you put your opinion out there you are also responsible to your readers, who most often than not value them with the same weight as someone that has multiple scars and many wars in their resume’.
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