Beating the Average Peer Lending Investment Strategies Scott Langmack March, 2009.
-
Upload
daniella-robbins -
Category
Documents
-
view
216 -
download
0
Transcript of Beating the Average Peer Lending Investment Strategies Scott Langmack March, 2009.
![Page 1: Beating the Average Peer Lending Investment Strategies Scott Langmack March, 2009.](https://reader030.fdocuments.in/reader030/viewer/2022032703/56649d225503460f949f7ec3/html5/thumbnails/1.jpg)
Beating the Average
Peer Lending Investment Strategies
Scott LangmackMarch, 2009
![Page 2: Beating the Average Peer Lending Investment Strategies Scott Langmack March, 2009.](https://reader030.fdocuments.in/reader030/viewer/2022032703/56649d225503460f949f7ec3/html5/thumbnails/2.jpg)
2
Agenda
• Peer to Peer Lending Overview• The Unbelievable Bank Industry Secret• Understanding Unsecured Credit and Defaults• Strategies for Maximizing Returns• What to Expect
![Page 3: Beating the Average Peer Lending Investment Strategies Scott Langmack March, 2009.](https://reader030.fdocuments.in/reader030/viewer/2022032703/56649d225503460f949f7ec3/html5/thumbnails/3.jpg)
Lending Is Investing?
• Two types of lending
Banks: Big, Powerful, Stable, Monolithic
Personal: The riskiest thing you can do
• Why are loans to people you know risky?
Banks will destroy your credit, come after you with lawyers and ruin your life
Your friend thinks you have “Extra Money”, you wont really miss it, and since its extra, you didn’t need it anyway
3
![Page 4: Beating the Average Peer Lending Investment Strategies Scott Langmack March, 2009.](https://reader030.fdocuments.in/reader030/viewer/2022032703/56649d225503460f949f7ec3/html5/thumbnails/4.jpg)
What If You Could Operate Like a Bank?
• For the first time in history, you can
• You can leverage Systematic selection of the best credit
borrowers Operational and Legal administration of
thousands of loans & payment processing The threat of ruining someone’s credit, and
coming after them with collections and lawyers
• All without ever getting your hands dirty
4
![Page 5: Beating the Average Peer Lending Investment Strategies Scott Langmack March, 2009.](https://reader030.fdocuments.in/reader030/viewer/2022032703/56649d225503460f949f7ec3/html5/thumbnails/5.jpg)
5 5
How To Think Of The Investment
![Page 6: Beating the Average Peer Lending Investment Strategies Scott Langmack March, 2009.](https://reader030.fdocuments.in/reader030/viewer/2022032703/56649d225503460f949f7ec3/html5/thumbnails/6.jpg)
How To Think Of The Investment
Bank Disintermediation
TAKING THE BANK OUT OF THE PICTURE
Powerful and sophisticated investing
6
![Page 7: Beating the Average Peer Lending Investment Strategies Scott Langmack March, 2009.](https://reader030.fdocuments.in/reader030/viewer/2022032703/56649d225503460f949f7ec3/html5/thumbnails/7.jpg)
The Unbelievable Bank Industry Secret
• Banks overcharge 20+ Million People
Banks overcharge the best to offer credit to the worst
Its about SHARE OF MARKET
7
![Page 8: Beating the Average Peer Lending Investment Strategies Scott Langmack March, 2009.](https://reader030.fdocuments.in/reader030/viewer/2022032703/56649d225503460f949f7ec3/html5/thumbnails/8.jpg)
8
Defaults Are Predictable
• The only thing that can possibly go wrong is that a borrower wont pay you back
• If you can know with a high degree of confidence the percentage of borrowers who will not pay you back, you can make money
• The entire trillion dollar credit card industry is based on this very real, very well known dynamic
![Page 9: Beating the Average Peer Lending Investment Strategies Scott Langmack March, 2009.](https://reader030.fdocuments.in/reader030/viewer/2022032703/56649d225503460f949f7ec3/html5/thumbnails/9.jpg)
Why Defaults Are Predictable
We are a credit society
• People with good credit get: Acceptance, options, stuff, pride Better interest rates on everything, including
mortgages
• When people default on a loan: Credit reporting agencies report broadly It means REJECTION, for credit cards,
mortgages, car loans, etc.
9
![Page 10: Beating the Average Peer Lending Investment Strategies Scott Langmack March, 2009.](https://reader030.fdocuments.in/reader030/viewer/2022032703/56649d225503460f949f7ec3/html5/thumbnails/10.jpg)
What's in a FICO Score?
10
![Page 11: Beating the Average Peer Lending Investment Strategies Scott Langmack March, 2009.](https://reader030.fdocuments.in/reader030/viewer/2022032703/56649d225503460f949f7ec3/html5/thumbnails/11.jpg)
Defaults Vary Dramatically By FICO Score
Credit card statistics for November ’08 to April ‘09
11
![Page 12: Beating the Average Peer Lending Investment Strategies Scott Langmack March, 2009.](https://reader030.fdocuments.in/reader030/viewer/2022032703/56649d225503460f949f7ec3/html5/thumbnails/12.jpg)
Default Rates are Part of the Return Formula
• Very best credit risk people• Low default risk = low interest rate loans
8%
0%
5%
10%
15%
20%
0.5%
Loan Rate Expected Defaults
0.8%
Fees
6.7%
Investment Return
12
![Page 13: Beating the Average Peer Lending Investment Strategies Scott Langmack March, 2009.](https://reader030.fdocuments.in/reader030/viewer/2022032703/56649d225503460f949f7ec3/html5/thumbnails/13.jpg)
Loan Rates Vary Based on Expected Defaults
• Higher default risk = higher interest rate loans
17%
0%
5%
10%
15%
20%
4.7%
Loan Rate Expected Defaults
0.8%
Fees
11.5%
Investment Return
13
![Page 14: Beating the Average Peer Lending Investment Strategies Scott Langmack March, 2009.](https://reader030.fdocuments.in/reader030/viewer/2022032703/56649d225503460f949f7ec3/html5/thumbnails/14.jpg)
Current Recession Adjustment
• Like banks and credit card companies, Lending Club raised rates to borrowers
20%
0%
5%
10%
15%
20%
7.7%
Loan Rate Expected Defaults
0.8%
Fees
11.5%
Investment Return
14
![Page 15: Beating the Average Peer Lending Investment Strategies Scott Langmack March, 2009.](https://reader030.fdocuments.in/reader030/viewer/2022032703/56649d225503460f949f7ec3/html5/thumbnails/15.jpg)
4 Keys To Maximizing Returns
1. Diversification is essential
2. Select for job stability
3. Select loan type
4. Select your rate and expected returns
15
![Page 16: Beating the Average Peer Lending Investment Strategies Scott Langmack March, 2009.](https://reader030.fdocuments.in/reader030/viewer/2022032703/56649d225503460f949f7ec3/html5/thumbnails/16.jpg)
16
#1 Diversification is Essential
• Best to have 400 or more notes• Make statistics work in your favor: visual example
16
![Page 17: Beating the Average Peer Lending Investment Strategies Scott Langmack March, 2009.](https://reader030.fdocuments.in/reader030/viewer/2022032703/56649d225503460f949f7ec3/html5/thumbnails/17.jpg)
Example of Ranges of Returns
Num
ber
of L
oans
Returns17
Expected Returns by Number of Loans
![Page 18: Beating the Average Peer Lending Investment Strategies Scott Langmack March, 2009.](https://reader030.fdocuments.in/reader030/viewer/2022032703/56649d225503460f949f7ec3/html5/thumbnails/18.jpg)
Example: 10 Loans
Num
ber
of L
oans
Returns18
Num
ber
of L
oans
Returns
Expected Returns by Number of Loans
![Page 19: Beating the Average Peer Lending Investment Strategies Scott Langmack March, 2009.](https://reader030.fdocuments.in/reader030/viewer/2022032703/56649d225503460f949f7ec3/html5/thumbnails/19.jpg)
Example: 100 Loans
19
Expected Returns by Number of LoansN
umbe
r of
Loa
ns
Returns
![Page 20: Beating the Average Peer Lending Investment Strategies Scott Langmack March, 2009.](https://reader030.fdocuments.in/reader030/viewer/2022032703/56649d225503460f949f7ec3/html5/thumbnails/20.jpg)
Example: 400 Loans
20
Expected Returns by Number of LoansN
umbe
r of
Loa
ns
Returns
![Page 21: Beating the Average Peer Lending Investment Strategies Scott Langmack March, 2009.](https://reader030.fdocuments.in/reader030/viewer/2022032703/56649d225503460f949f7ec3/html5/thumbnails/21.jpg)
#2 Select for Job Stability
21
Job Stability The Most Consistent Factor
• Look For: Length of employment Stability of company Quality of company Stability of industry Tenure
• Watch Our For: New jobs New careers Lower paying jobs Low tenure
![Page 22: Beating the Average Peer Lending Investment Strategies Scott Langmack March, 2009.](https://reader030.fdocuments.in/reader030/viewer/2022032703/56649d225503460f949f7ec3/html5/thumbnails/22.jpg)
22
#3 Evaluate Loan Purpose
Lending Club statistics show defaults vary by loan purpose
Data based on loans 12 months and older
Vacation
Wedding
Green Energy
Car
Medical
Credit Card Refinancing
Debt Consolidation
Other
Moving
Education
Home Down Payment
Home Improvement
Business Loan
Best
Average
Worst
![Page 23: Beating the Average Peer Lending Investment Strategies Scott Langmack March, 2009.](https://reader030.fdocuments.in/reader030/viewer/2022032703/56649d225503460f949f7ec3/html5/thumbnails/23.jpg)
23
#4 Select Your Risk/Return Mix
• More volatility in the higher ranges Example: Current LC total portfolio of loans between 12 and 18 months old:
Target Return
![Page 24: Beating the Average Peer Lending Investment Strategies Scott Langmack March, 2009.](https://reader030.fdocuments.in/reader030/viewer/2022032703/56649d225503460f949f7ec3/html5/thumbnails/24.jpg)
11%
What to Expect: Default & Return Curve
0 3 6 9 12 15 18 21 24 27 30 33 36 39
Months
0%
1%
2%
3%
4%
5%
6%
7%
8%
Delinquencies + Defaults & Charge-offs
all impact NAR
13-1=12%
13-7.5=5.5%
13-4.75=8.25%
13-4=9%
Net Annualized Return At Various Stages Of 13% Loan Portfolio (LC Fees not included)
9%
13%
12%
10%
Net
Ann
ualiz
ed P
erce
nt
24
![Page 25: Beating the Average Peer Lending Investment Strategies Scott Langmack March, 2009.](https://reader030.fdocuments.in/reader030/viewer/2022032703/56649d225503460f949f7ec3/html5/thumbnails/25.jpg)
25
200
8 L
oa
ns2
009
Lo
ans
25
: Default Curve Example
![Page 26: Beating the Average Peer Lending Investment Strategies Scott Langmack March, 2009.](https://reader030.fdocuments.in/reader030/viewer/2022032703/56649d225503460f949f7ec3/html5/thumbnails/26.jpg)
26
Beating the Average: Recap
1. Diversify x400+
2. Job stability
3. Purpose of loan
4. Select risk/reward
26