After giving my Lending Club Fail post some further thought, I have decided to cash out my position in Lending Club notes. This decision did not come easily, and I have rolled this idea around for a while now.
I will exit my position by not-reinvesting any of the cashflow from the notes and then periodically pulling out the cash. I have about 5K in Lending Club, so this could take a while. I have several reasons for doing this, and I’m going to use this blog post to rationalize the decision. Also, I bought some shares of Lending Club stock so I have a few thoughts on that below.
The Return is Not that Impressive (given the risk)
When I initially decided to fund a Lending Club account, my goal was to chase double digit returns. This may sound stupid, but I’m young and stupid so what can I say. After a year and a half of so of investing with LC I am right around a 6.5% return. Nothing to sneeze at, but a far cry from what I was originally gunning for. Plus, I think these Lending Club notes are pretty risky, so I am not sure if a 6.5% return is justifiable.
I will admit that part of the poor returns are due to an over-aggressive and poor strategy on my part. And as an aside, my goal here isn’t to bash Lending Club notes. I am just calling this as I see it, and as it applies to me. Some people with Lending Club accounts are seeing double digit returns, and I think that’s awesome. Personally, I’m looking to scale back my position and seek out a greater return.
I’d Rather Invest in an Asset Backed Security
One of my biggest problems with Lending Club is the fact that the notes are unsecured, and I think I can find less risky debt to buy that will yield a similar or better return. I’m not sure what lengths LC goes to in order to ensure the note perform (eg, what their collection process is like if the borrowers don’t perform). I can speak from anecdotal experience that there are significant chargeoffs on these loans (especially if you invest in the riskiest) and I don’t see any reports of LC collecting on any of this bad debt. If they are, that money sure as hell isn’t finding it’s way back into my account. Since LC takes their cut off the top, it’s not really clear to me what Lending Club’s incentive is to make sure these notes continue to peform to their maximum potential.
Sure LC claims to have measures in place, and I’m guessing they sue on some of these notes, but they are probably not as aggressive as a credit card company. Credit card companies sue on their notes. If you don’t believe me, take a trip to your local Courthouse on small claims court day. 75% of the people there have been sued by debt collectors.
So with all of that in mind, there seem to be a lot of internet crowdfunding start ups in the real estate space. The nice thing about this is there is an asset to levy upon if the shit hits the fan. Sure that asset may fluctuate in value, but I doubt we will see the categorical clusterfuck that we saw during the great recession. If the loan to value ratio is appropriate you mitigate your downside and have some collateral.
I’d Rather Invest in Something that Runs Counter-Cyclical to the Stock Market
Lending Club advertises itself as an investment that runs counter-cyclical to the stock market, conjuring visions and safety and stable returns. On the surface that may be true. Lending Club notes don’t seem to have the gyrations of a stock. However, on a more macro level I am not sure if this is accurate. I will be very curious to learn what happens to a Lending Club portfolio if the economy tanks for an extended period if time.
This is uncharted territory, as Lending Club hasn’t been around through a recession yet. Who knows, maybe these notes will hold up fine. Or maybe we will see a massive default rate. It’s anyone’s guess and at this point given the somewhat soporific returns of my note portfolio, I’d rather have some liquidity to potentially invest in something that I know runs counter to stocks.
Lending Club Stock
OK, I’ve spoken enough about liquidating my LC portfolio. And I don’t know if I will completely liquidate it, but I want to at least cash out half of it and pare back my position. My guess is this could take a while, although I already withdrew $75 after the first week of turning off auto-reinvest.
What I want to do now is talk about Lending Club Stock. LC stock has floundered since it’s IPO, and it recently took a beating after all the controversy with the CEO.
I have a small portion of my portfolio that I use to play around with individual stocks, and I have decided to go long on LC and picked up $2,000 worth of shares at $4.20/share. Right now it’s trading a little below $5. I have no idea where it will go (hopefully up, obviously), but knew that the price was approaching book value, and despite my personal misgivings with LC, I still think the business model has legs. I don’t know how long I will hold this stock – this is pure speculation. Akin to going to Vegas and putting 2K on black.
If it goes up much higher I’ll probably just sell and invest the proceeds in index funds (where the majority of my money is). But I thought this could be a cool opportunity to pick the stock up at a discount so lets see what happens. I’ll probably win the Darwin Award for personal finance blogging. As always, this is certainly not investment advice.
I’ll let you know what happens. My goal with the blog is to share my successes and failures, and if this fails like my original Lending Club experiment did, then I’ll let you know.