Well that’s strange. Why were so many people interested in visiting my sleepy little site on Christmas Day?

Oh, so there you go. New XBOXs!

History

This is not my first foray into the world of peer-to-peer (P2P) lending. Loyal readers (hi, you two!) might recall that I invested in loans through Prosper back in 2006 and 2007. You may also recall that I didn’t fare too well. Here’s my current account status:

To review: out of 28 loans, 11 were paid as agreed, and 17 were ultimately sent to collections or discharged through bankruptcy, where I either got pennies on the dollar or nothing at all.

Those investments were discussed previously in this blog:
http://www.bbhart.com/81/prospercom/
http://www.bbhart.com/265/prosper-13-months-later/

Rationale

So why am I back to P2P lending for more punishment? Well, a few things are different this time.

1. My mood towards the stock market has soured. I’m not confident stocks as a group can deliver their historical rate of return in the decades ahead. I’ve been out of school, in the work force, and saving for retirement since 1997. In that time the S&P 500 has seen a compound annual growth rate of 5.64%. I believe I can do better, but I’m also realistic about what’s truly possible. I’d feel successful if I earned 8-10%.
2. I’m investing with Lending Club instead of Prosper. Lending Club was the first US peer-to-peer lender to register its offerings with the SEC. They’ve had a number of years now to tune their business model. Regardless of how you might feel about the SEC, investing with a company that’s subject to some degree of SEC oversight is probably safer than a company that isn’t. I don’t blame Prosper — they were learning the same expensive lessons that I was and I truly feel they had altruistic motives — but I’m trying a different company anyway.
3. I’m investing through a self-directed IRA (SD-IRA). One of the biggest headaches I had with Prosper was dealing with the taxes once March/April rolled around. They basically act like 28 individual securities, which means a lot of typing into Turbotax. With the IRA account, I invest free of the taxes or tax reporting burdens I would’ve had with a regular account.
4. I’m dealing with lots of loans this time around. Instead of having $2,500 tied up in 28 loans at Prosper, I’ve invested twice the money ($5,000) in 7x the number of loans (~200 when fully funded). This spreads the risk amongst lots of individual borrowers.
5. Historical defaults are known, and I’ve factored them in to my expected rate of return. I invested in Prosper when the company was brand-spanking new. They were learning, and I was learning. Turns out their default rate was much higher than they anticipated, which destroyed return on investment (ROI). They didn’t have years of data to draw conclusions against. Lending Club does. There will be defaults, but since there’s an acceptable amount of historical data (in my opinion) to be able to predict default rates, I’ve factored defaults in to my expected ROI.

Getting Started

I dragged my feet on getting everything set up. There are a few more hoops involved in setting your Lending Club account up using retirement funds. The process isn’t difficult, per se, but neither the documentation nor the automation is where it needs to be to make it dead simple for investors of all ages and computer skills. The flows appear to be:

Forms
You ---(mail or fax)---> Lending Club ---(forwards to)---> SD-IRA Services

Money
You ---(check or rollover form)---> SD-IRA Services ---(wires to)---> Lending Club

At the end of it, you end up with a Self-Directed IRA account at the aptly-named Self-Directed IRA Services and a Lending Club account. One interesting side-effect of having a self-directed IRA is that I can invest retirement funds in things like real estate, stock of privately-held companies, and tax liens.

One important note: if you want to do the Lending Club IRA thing, you need to use a special link on the Lending Club web site to kick off the process, and it’s not always easy to find. If you blow it and create a regular account, thinking there will be a place where they ask you what kind of account you want, then their support people have to delete it and you start all over again, which can take a day or two.

You can roll over part or all of an existing Roth or Traditional IRA over to SD-IRA/Lending Club, but I opted to make them my 2011 Roth contribution, which meant I just mailed them a check. I can’t comment on how smooth the rollover process is, but I’d expect they do a lot of them and it wouldn’t be any problem.

Investing

Once the forms were received and my check was cashed, I ended up with basically what amounts to 5,000 shares of my Lending Club account worth $1 each in my SD-IRA account (see below) and an available cash balance of $5,000 in my Lending Club account.

One of my problems with Prosper is that I ended up engaging in emotional investing. I read people’s sob stories and ended up investing a disproportionate share of my funds in their loan. Turns out those people default just as frequently as everyone else. Thus, Rules 1 and 2 were born.

Brian Rule 1: Nobody gets more than $25 from me.
Brian Rule 2: Ignore the stories.

Which is better: 25 loans of $200 each? Or 200 loans of $25 each? I don’t know; I’d say it depends on who the 25 loans are for. But I feel better having my loans spread amongst many people. As for ignoring the stories, time will tell on whether that’s a good idea, but if everything else is in place (additional Rules below), then I’m less concerned about how you acquired the debt as I am in your ability to pay off your loan.

For the first $3,500 or so of my total $5,000, I used Lending Club’s Invest function.

Clicking Invest automates Rules 1 and 2 for you. It builds a portfolio of $25 notes (Rule 1) and it doesn’t read the borrower stories (Rule 2). What it does do is build portfolios based on your risk tolerance. It doesn’t discriminate between types of loans, though, so if you’d rather not loan to someone starting a business or needing to cover medical expenses, this feature probably isn’t for you.

As strange as it sounds, for the first $5000 I felt it was more important to get my money placed than to spend hours and hours vetting $25 loans one-by-one. I used the Invest function for the initial $5000, but after all was said and done with rejected or expired offers, about $3500 was allocated and the remaining $1500 was left over to reallocate. At that point, I decided it was time to get more particular about the loans and make some more rules.

Brian Rule 3: Invest in higher-rate loans.
Brian Rule 4: Focus on debt consolidations.
Brian Rule 5: Borrowers should have jobs. Even better if it’s for the government/military, and better still if they’ve been there for at least 1 year.

Lending Club’s historical data demonstrates that investing in higher-rate loans will net a higher return than “safer” loans when you subtract out the default rate. In other words (and speaking generally), which one would you prefer?

• 8.9% with 1% defaults = 7.9%

  OR

• 16% with 5% defaults = 11%

In my opinion, the answer is: it depends. If you play it by the numbers, and expect default rates to remain close to their historical values across all class of borrowers, then you’d chose the 16% portfolio. On the other hand, you might sleep better at night knowing only 1% of your loans will default, as opposed to 5%. You’re loaning real money to real people; it might effect you emotionally to have some of those people stiff you. You will want to minimize the number of defaults, even if it means a lower rate of return, just so you can sleep more soundly at night.

I tried to remain unemotional with Prosper, but it’s hard to do that when you read the borrower’s hard luck story before deciding to invest. Once the loans were funded, I found myself rooting for these people, even though I knew some of them would skip out on me. And sure enough, when a loan would go from 30 past, to 60 past, to 90 past, to Sent To Collections, I would scream inside “But you were one of the good ones!!! This wasn’t supposed to happen!!!”. Like I mentioned earlier, I made fewer loans with a higher amount-per-loan than I have with Lending Club, which didn’t help me divest myself emotionally. One loan defaulting hurt.

For my last $1,500 I decided to set up some basic filters in Lending Club’s Browse Notes screen. I wanted to exercise a bit more discretion in the loans I made, while trying not to become emotionally involved. This meant paying closer attention to the borrower’s statistics, while trying not to become too involved in their business. I screened for Debt Consolidation loans, for people with a steady job under their belt, who were mainly in the C/D range, with some B’s and D’s (and even a few E’s) tossed in there, those who had had their income verified by Lending Club, and where Lending Club had already approved the loan. Very few loans met all those criteria, and certainly not $1,500 worth at $25 each. I loosened the criteria some, relaxing the Approved status and looking at some loans that weren’t Debt Consolidation, and have been able to come close to funding out my full $5,000.

All told it will end up taking close to 3 weeks to fully invest my initial $5,000. Some loans I agreed to fund either expired before being fully funded or were rejected by Lending Club for some reason. When that happens, the money is returned back to me to reinvest, but days or weeks may have passed where that money was idle. It ends up being a fair amount of work to place all your money, but once it’s done, all you have to worry about is either re-investing the money people pay you every month or pulling it off the table and finding something else to invest in.

Wrap Up

As of December 19, this is what my account looks like:

I’m still waiting on $150 to find its way into funded loans, but otherwise, as I mentioned, it’s taken me about 3 weeks to invest $4,850 in loans that pass my sniff test. You can expect that I’ll update this blog periodically with how it goes.

Update 12/20/2011: Peter Renton from SocialLending.net reminded me about lendstats.com. LendStats is not affiliated with Prosper or Lending Club; you could use it to do a sanity check against what those sites are reporting for performance. Here are my stats for my old Prosper loans.

Why USAA? We live virtually, meaning if there’s a way to do something online, we’ll do it. USAA has free checking, with free checks, free debit transactions, and free ATM withdrawals(a). I can deposit a check into my account just by taking a picture of it with my phone. It’s easy to get a CSR on the phone(b). They don’t have branches, but if I need to make an in-person deposit and not do the smartphone picture deposit thing, then I can go to the UPS Store here in Celebration and make my deposit there. If I need an official check, I can order it online and they’ll mail it to me. In a nutshell, I can do all my banking without leaving the house, which is how it should be in the year 2011.

Why not Bank of America? For the most part, I never really paid too much attention to banks. For what we do, I thought a bank is a bank is a bank. Then BOA announced a few months ago that they were instituting a service charge for debit card users, a response to their fees being capped by the Dodd-Frank financial regulation law. I’m not a debit card person — I use my credit card anywhere and everywhere(c) — so the new fee wouldn’t have affected me. But the announcement did get me thinking. BOA is still profiting from each and every one of their debit card transactions, they’re just now making less. Again, it’s not that BOA is now taking a bath on debit cards, it’s that they’re now only making $x a year in profits as opposed to $x * 2.

It’s not that there was one event that caused me to spend time moving my accounts somewhere else(d). It was a slow build-up, death-by-a-thousand-cuts… a 10 minute wait in a phone queue, a crashed web site, long lines at the branch. They’re probably too big for their own good. Scale is good up to a point, but you reach a certain size where you’re receiving the optimal benefit from that size, and once you exceed that size, stuff starts slipping through the cracks. An organization gets so large they get bogged down in bureaucracy and internal politics, and they can’t affect the changes that keep them responsive to their customers and competitive with respect to rates and products.

The USAA web site is not as friendly as Bank of America’s, but overall I’m happy with the move so far. Time will tell if it stays that way.

(a) – Up to 15 a month.
(b) – To close my accounts, I first tried calling BOA this morning at their 800 number for checking and savings accounts. There was no option for Close Account on their phone tree. When I pushed the option to speak to an agent, it told me the call center was currently closed. The call center opened at 7am; this was at 8:30am.
(c) – And religiously pay it off every month.
(d) – And it does take time. I probably spent 3 or 4 non-contiguous hours making the move. That’s time opening accounts, canceling and re-adding ACH links, ordering checks, setting up smartphone deposit capability, and other stuff.

Before I get into my thoughts on the computer itself, let me type at you for a minute about the Apple Store experience.

I do not like it.

I need order, not chaos. I need to know where to find my product, and where to pay for it. Instead, engaging someone to ask questions of or, more importantly, to give money to, is something closer to checking in at a busy foreign airport.

Backing up a little bit, I’d decided last week that I needed a new laptop. Work provides one, but it’s mostly inadequate. The virus checker runs almost non-stop, which kills performance. When the virus checker isn’t chugging, Outlook is doing God-knows-what; I can open Task Manager and watch it writing, writing, writing. The battery lasts about an hour, probably because of the virus checking and Outlook activity. It’s heavy and bulky and I’m not crazy about the keyboard and Outlook freezes every day or so when trying to do things like, you know, receive email, and… and… and… it’s enough already. Windows is still mostly unsatisfying, though Windows 7 is their best OS yet and I don’t mind it that much. But it’s still not the computing experience I expect. I’m still fighting my PC.

So I’d decided I was buying myself a Mac laptop, but hadn’t decided between a 13″ MacBook Pro and a 15″ MacBook Pro. I needed to go to the store and poke and prod them. Since I’d done a fair amount of research online before hitting the store, I didn’t need to spend a lot of time comparing specs, but felt I needed to lay on hands to see what felt right. And after all the touch tests, the Air became the clear winner for what I needed. The weight different between a 13″ Air (2.96lbs) and a 13″ Pro (4.5lbs) is surprising. You wouldn’t think 1.5 lbs would make a big difference, but it does. I picked the Air up and it just felt right. The intention was to buy a laptop for email, communications (Lync, Skype), web browsing, development, and documents. No heavy gaming or video editing, no 200GB media library. When I took all that into consideration, the choice was simple.

Now I’m in the Apple Store and I’ve decided which laptop I want. I’m ready to give someone money. But I can’t find someone to take my money. There’s a 1:8 ratio of Blue Shirts to customers, everyone occupied. The storefront greeter person says they have a new system, called iQueue (and why not?). He walks me over to the nearest laptop and hits a button on the iPad next to it, which is supposed to place me in a queue for a blue shirt. But it posts an error. Try again, error. Aha! After the 7th time, it says I’m in a queue. I’m instructed to wait by my designated iPad and wait for a blue shirt. For grins I start the Timer app on my phone to see how long it takes. Then I proceed to spend the next 10 minutes and 37 seconds standing like a tool waiting for someone to come by, all while (unsuccessfully) trying to flag down someone else that can help me before that. Remember, this is me basically trying my best to hand someone $1383.

There’s a psychology and/or industrial design lesson in here somewhere. So yes, I’m not a fan of the Apple Retail experience.

The problem is, it doesn’t much matter in the end. If I’d said screw it after 8 minutes of waiting, I still would’ve gone home and bought it from the online store, where the margins are even meatier. Apple wins either way.

But now I have the laptop, and the memories of how I acquired it are starting to fade. It’s a beautiful product. The screen is the right size for me. The exterior feels solid despite the light weight. The keyboard is a pleasure. The solid state drive is zippy and the 128GB capacity shouldn’t be a problem since most of my stuff is stored “in the cloud” or on our home NAS. I’ve been sitting on the couch typing for 100 minutes now and it just occurred to me to check the battery life. Oh, still 65% left. I rebooted once yesterday when upgrading to OSX 7.2 and some other updates, and not because of a crash. Outlook for Mac 2011 is on here and isn’t the complete disaster that Entourage was. Skype, Chrome, and Dropbox all work fine. The touchpad is by far the best pointing device I’ve used on any laptop so far, even including ThinkPad’s eraser-nub stick. I’d love to complain about something, but I can’t yet. Perhaps since I came into this relationship with such low standards I can’t see the flaws under the surface and I’ll have a monster blog post in a few weeks railing on all the problems I’m having.

Oddly, this is only the second Apple computer I’ve ever bought, despite having used Apples for 27 years or so now.

Another delightfully lazy day in the Tri-Cities area of eastern Tennessee. The two year old has been pushing limits, as usual, and the girl has slept a lot of the day away… and when she’s been awake, she’s been doing cute baby stuff like smiling and cooing.

I don’t believe it will get any warmer than 70 today. Nice. A much needed reprieve from our looooong Florida summer.

My condition feels even better today. Still very much there, mind you, but starting to approach something I’d consider livable. Perhaps this is the start of something wonderful.

Some of the day was spent rifling through some of the boxes in storage, where I came across our old Legos:

And a Marklin train starter set:

We packed the car aggressively this trip, but there still isn’t any spare room, so these won’t make it down to Florida until a future trip. Probably for the best, anyway, as the kids aren’t old enough. Tomorrow we’re planning to get out and about, either playing at my brother’s family’s house or going to one of those places where they have a bunch of inflatable bouncy houses set up in warehouse.

It was overcast and drizzly much of the day, but we still managed to get outside some. For me, this was the first full day of being on Allegra to try to fix my face pressure issue. For son, it was his first time riding in a wagon! I pulled him around in the garden wagon. We went down to the end of the road and back, and then I pulled him up and down the hill on his grandparents’ property. He loved it! Afterwards, he wanted to get out and run up and down the hill. Since it’s a great way to tire out a two year old, we did that for 20 minutes or so.

As for the Allegra, I can’t tell if it’s working, or there are other factors at play. I started taking it on advice from a doctor here. The doctor’s office was able to schedule me for a same-day appointment, even as a new patient, but it was mostly an uncomfortable and unfulfilling experience. I felt I was greeted with a generous helping of skepticism about my condition, which only improved slightly when I furnished a two page write-up from my maxillofacial expert in Orlando. Perhaps my expectations were too high as an out-of-towner.

I do feel significantly better than when we arrived here in Tennessee, but I don’t know whether that can be attributed to the Allegra, to not having the stress of work, to being outside in the fresh air in sub-80 degree temps, to being able to play and laugh with the kids, or what. I’m taking my part of this vacation a day at a time and trying hard not to do anything to aggravate my condition. It’d be amazing to drive back to Orlando feeling normal or mostly normal again. Of course, by the time this is published I’ll know whether that happened or not.

My brother and his family came by for dinner, which included teriyaki flank steak and 1905 Salad, so it was all good.

As expected, the Boy was a little standoffish around all the new people, but got into it towards the end and was running around and carrying on with the rest. The baby did what babies do.