Update: Distressed P2P Investing Experiment

Since no one spoke up against the idea, this is going to be a monthly feature for a while. If you don’t want to hear about it so often, feel free to complain in the comment section.

Sometime back, I embarked on an experiment that involved investing in Lending Club notes on the secondary market. My goal was to buy “distressed” P2P loans at a discount that was higher than the default rate.

The really dumb, simple math goes like this:

If you can buy loans that are late (in the grace period or whatever) for $0.65 cents on the dollar (35% discount), but the default rate is only 25%…you will make money…like more money than the 6.5% returns I’ve been getting with my more traditional P2P experiment buying primary loans when they’re originated.

Now there are plenty of loans available on the secondary market at pretty steep discounts. But I suspect that a lot of those discounts are warranted (i.e. the true default rate of the distressed notes is equal to or even maybe greater than the discount on offer).

When I first started out with this I bought a bunch of notes indiscriminately, focusing more on the size of the discount than the underlying debt.

That initial batch of loans has had a pretty bad failure rate and is dragging down the initial results of this experiment.

I’ve since gotten a lot more discriminating. It’s probably too early to tell if my more rigorous process improves things or not. I still have around $500 more cash set aside to buy the “junk” notes if I decide to keep pursuing this strategy. For now I’ll continue to provide monthly updates on whatever happens.

Anyway, this is what’s going on with my junk P2P investing experiment.

Distressed notes purchased

46

Total amount invested

$395.42

Outstanding principal remaining

$277.35

Adjusted value of principal remaining

$183.28

Payments received

$49.51

—-Principal received

$36.84

—-Interest received

$12.57

—-Late fees received

$0.10

Actual losses (charged off)

$225.66 (31 loans…$689.19 in original principal)

Principal in default

$0.00 (0 loans…$0.00 invested)

Principal 31-120 days late

$65.30 (4 loans…$40.32 invested)

Principal 16-30 days late

$59.04 (4 loans…$43.08 invested)

Principal in grace period

$0.00 (0 loans…$0.00 invested)

Principal issued and current

$153.01 (7 loans…$86.36 invested)

So looking at the loans that have been charged off, the loans were bought at an average of a 67% discount ($225.66/$689.19 = $0.33 on the dollar). That exactly equals the failure rate (so far (31/46 loans = 67%). But some of the loans that are just late now will end up being charged off, and my discount wasn’t as steep on those ($83.40 invested in $124.34 of principal = $0.67 on the dollar).

TLDR: I’ve lost a lot of money so far, but I could make a lot of it back if the current loans stay current and pay out fully to maturity.

I blame a lot of this disappointing performance on accidentally buying a bunch of notes in the same loans, which means my failure rates are really more concentrated than the numbers suggest. Hopefully my results going forward will be a little better since I’m paying attention to what I’m buying now.

I’ll keep on keeping on with this and keep you all up to date.

Well, what do you think about my crack-pot, half-baked, waste-of-time experiment?

Shout! Shout anonymously on the internet! Comments are encouraged.

4 thoughts on “Update: Distressed P2P Investing Experiment

  1. I ran a similar experience four years ago and lost money. My biggest frustration with Lending Club specifically is they refuse to report YTD returns, which have been very bad. Best of luck but keep it small

    1. Wow, I didn’t realize the secondary market had been around that long.

      Yeah their “Adjusted Net Annualized Return” is a pretty shifty number. I think the problem is that they don’t really know what the charge off rates are going to be. I mean it’s not surprising…that’s the whole premise of fin-tech right? Move fast, break things, be unconventional.

      But the consequence of that is your algorithm takes a while to develop accuracy.

      Thanks for visiting. Don’t be a stranger.

  2. Interesting idea. Do you do these investments for more of an experiment then anything? Seems like a lot of effort for the reward? Interesting to read about though! Have not really ventured into the P2P lending world much.

    1. Oh yeah. It’s purely experimental. It is way more effort than the actual return is worth.

      As for the more “conventional” P2P stuff (investing in primary notes at origination), it seems like a lot of people have soured on it lately and are getting out. That’s probably thanks to disappointing returns. Obviously I’m kind of fascinated by it, so I’m sticking with it out of academic interest more than anything else.

      I think my process and screening criteria doesn’t take too long to implement on a month by month basis, and seems to work pretty well at getting between a 6%-8% annualized return…which isn’t horrible. But it’s probably not great in a risk-adjusted sense…these are unsecured loans to strangers on the internet after all.

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