Saturday, April 19, 2014

Lending Club update Q1-2014

I had originally tested out Lending Club back in 2009. At that time, I didn't like their tax reporting and their software was lacking. However they were new so I did want to give them some time to improve and so in January of this year I came back to them. The first quarter is up so lets take a look at how its going.


Strategy: I previously discussed my strategy in what I would be picking.
High yield notes that have aged at least 10 months. The vast majority of defaults occur in that time.
I plan to run this account up to 100 notes.
Currently I have 23 but I placed an order today for 10 more and have funds coming for an additional 10. I am hoping by July that I will hit my 100 mark.

Fees: Fees were my #1 concern as that is taken out of profit. I had estimated 3% but admitted that it could well have been that high as I was buying and selling on the market frequently back in 2009. Currently, I am calculating it based upon the interest I received. I want to know how much net profit I make and how much its going to cost me to make that profit.

Results: I returned to my account in January and Lending Club estimating an 8.8% net yield.
I've already improved it and am now in the average yield range. I expect it to continue to rise over time assuming my screening strategy works out...



January: January was a scratch month so to speak as I was only transferring money.



February: My first month of payments.



Ok so I already see a problem with Lending Club's report. It shows I ended January at just over $100 yet I start February with $314. I had a deposit of $200 land on 1-30-14 but that should clearly be in January's total. Seeing as how it takes Lending Club a full week to generate this statement this error is pretty weak.

For fees I paid $0.12 for $4.86 in interest received. 2.67% fees is what I am paying here.



March:


Well they fixed January's bar chart total and all the account totals for all three month's starting and ending totals are matching up. The fees though are incorrect.
There is no way that I added more funds, bought more notes, and paid less fees then the previous month without having any late or delayed payments, which I didn't. I went through the account activity section and counted up $0.18 in fees from 3-1 through 3-31 which is to be expected as I had 18 notes worth of payments that month.
$0.18 paid on $7.02 of interest comes to 2.56% paid in fees which is pretty close to last month.

I have to admit that at this point I am rather concerned at the reliability of their reports.The yield is great but to have inaccurate financial reporting is inexcusable. As this is only a small portion of my portfolio though, I will continue to monitor.


Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial adviser, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.

Sunday, April 13, 2014

Monthly Update: March 2014

My work situation is getting better and improving with my stress level dropping and my time and energy to focus on my portfolio is returning. Management finally realized how they blew it and hurt the team. They are hiring a third new person which short term means more work in training but will obviously pay off later. I was approved for overtime and have been putting in a lot of extra hours which was stressful but will give me extra money to work with.
I am looking forward to a more frequent posting schedule...

Portfolio Activities
$1,000 deposits into Investing account
$50 deposits into Lending Club
Bought 16.9211 shares of JNK @ $41.14


Portfolio Income
Dividends
Total: $96.33
     AFL: $2.15
     IBM: $1.90
     MCD: $2.23
     ARCP: $6.35
     VTR: $12.06
     PSEC: $7.51
     TCPC: $22.42
     COP: $2.51
     NDRO: $3.13
     WHZ: $29.61
     BLV: $2.47
     JNK: $1.45
     PCY: $1.95
     Interest from Cash: $0.59
Lending Club
     Interest: $7.02
Rental Income
     Townhouse 1: $855

Vacancy: My tenant received orders that they are being sent to another military post, they are a military family, and had to move. When this occurs, my property manager keeps $300 of the last month's rent for costs. Mostly for advertising, listing costs, and cleaning. If they don't use it all then I get the left over sent to me. Its looking like I will have a vacancy for the month of April which will be rough. That's $855 less income I am getting yet my bills do not drop. Still have to pay the mortgage on it. With the overtime I am getting at work I don't think I'll see a drop in April's deposits. Hopefully it won't be vacant for two months.

Broke $100 income barrier: I had a great month income wise and broke the $100 level for the first time. Now technically I do have my rent of $855 coming in and I do record that. However, mentally I do not count it because my mortgage and other costs are greater then the rent I receive. Dividends and Lending Club interest though are a different matter. Its been a long road since I first started my blog back in April 2011 and I have a long ways to go, but its good to see the progress I've made. Its something I take pride in as most people are stuck in the "Yeah I really gotta get around to working on my finances someday." mentality.

Lending Club is going well: While I am annoyed at them taking so long to get their monthly statements to me, the fact that that is my only problem is pretty good. I'm currently have a 21% average yield. That won't last forever as sooner or later I will have a default. Until then, I'll enjoy it.

Cemig (CIG) woke up: CIG has risen 30% since March 14th. Nothing really changed but its a great example of what buying a deeply undervalued company gets you. It had dropped to a P/E of 3.5. Three point five. There is a lot of fear out there over the economy of Brazil but they aren't a luxury item or discretionary goods company. They are one of the biggest electrical companies in Brazil. People aren't going to stop using electricity. I should be getting news of the first dividend this month.



Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial adviser, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.

Tuesday, April 1, 2014

How stress and life can encroach into your portfolio

Its no secret that I have been posting infrequently as of late. No the blog isn't dying. Yes I am still around. However, instead of leaving it just at that I thought that discussion of why I'm posting less recently would be a useful topic.

At work I was on a team of 5 people. We are down to 2 of us as 3 others have moved to different teams and management has been slow in rehiring. The workload has staid the same and the other guy has some chronic health problems and is often out 1 day of the week. We also merged with a team of 6 that is also understaffed. I applied for and got a promotion as the lead over it all. I have no idea what those other 6 does but am no responsible for them now.
I work in I.T. and have to renew a certification by the end of April or I lose my job. Even understaffed, its a requirement without exception. Additionally I am going to college and trying to work that into my time. To say my stress level is high is an understatement.

What does all that have to do with investing and trading? Psychology plays a big role in running a portfolio. More so than I think most people realize. You are taking your income from your day job and trying to grow it and that responsibility is yours alone. You can read blogs and get ideas from others but its your finger on that buy button on your broker's platform. If your mind is on other things can you really be sure that you fully researched this company? Perhaps you missed something during your research because your mind was on other things. Doubt can creep in and you start to second guess your existing positions on if you should stay long or switch to something else.

I've come to learn the hard way over the years to keep an eye on my mentality and psychology to make sure its not interfering with my portfolio. Its surprising sometimes how easy it is to screw up your portfolio when your focus is on something else. I've purchased call options when I wanted puts because I was mentally distracted while placing an order. So when I find myself overwhelmed I have to slow thins down portfolio wise. Cash is a valid position and times like this is a great time to just sit back and sit out a round or two of the markets. They'll always be there for when we are ready but we have to be sure that we and our portfolios will be there in the future and not blown up.

Now dividend investing seems pretty stress free. You buy a solid company and sit back and wait for the dividends to roll in so you can compound. Just look at the solid companies like Johnson & Johnson, Coca-Cola, and other stalwarts of the business world. It's easy to buy a company that will last for decades that will always increase their dividend right?
Well take a look at the historic listing of the Dow Jones. Just 10 years ago it held such solid companies as GM, Eastman Kodak, AIG, and International Paper Company. We have to be aware of survivorship bias where we look at which companies survived and ignore the ones that struggled or went out of business. Dividend investing takes a lot of time to compound in those 2%-3% yields and you may not notice you have a problem right away. Think back to 2008 and ask a person invested in Citigroup or Bank of America how many years (or decades) of dividends will be needed to make up their losses. They might well have been worried about their job and their focus was distracted on other things in their lives.

We are all human and far more than just an investor...
We are mothers with sick children in the hospital.
We are employees stuck in a crappy job thinking about how our last interview went and why won't they call to tell us how we did.
We are husbands and boyfriends going through a rough patch in a relationship.
And yes, we are investors with our finger on the mouse deciding if we should click "buy" or not.

How we deal with stress in our lives can make or break a portfolio quicker then picking the right stock.


Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial adviser, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.

Thursday, March 13, 2014

Warren Wednesdayish: H1 1962

A rather uninspiring letter but it does only cover half a year and they all can't be groundbreaking works of financial wisdom...

H1 1962
Written: July 6, 1962
Length: 7 pages
SourceRPCPA.com
DOW return for H1 1962: -21.7%
Buffett's return for H1 1962:  -7.5%
Major events: The U.S. Navy Seals are created.

Bob Dylan releases his debut album

Warren starts of this letter with reprinting his prediction warning from a previous letter. Essentially reminding everyone that he doesn't make predictions and that he doesn't expect to beat the Dow every year. When it drops he does plan to do better then a rising market.
What is new this time around is that he mentions his declining market goal of only losing 0.5% for every 1% loss in the Dow which he beat this time around.

He again discusses how large funds are doing as way of comparing himself and the Dow to other professional money managers.

The next sectional really has to make you wonder about where his partners are right now. He mentions people taking monthly payments and others taking 6% annually out of their partnerships. Wonder how much that set people back vs the potential of being billionares. I'm sure they still did good assuming they staid with Warren.

Warren must be getting popular as his lawyers advice him to take on only another dozen new people and the entrance fee is raised to $100,000

Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial adviser, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.

Saturday, March 8, 2014

Monthly Update: February 2014

In this day and age where Amazon is working on flying robots to deliver your packages and Google is working on self driving cars, how in the world can Lending Club be so slow? It took over a week to get their monthly statement to me, hence the delay in my monthly update. For a guy who is used to running his monthly numbers the night of the last day of the month, waiting a week felt excruciating. #firstworldproblems to be sure and it is better then #eatingketchupsandwichestillpayday.

Portfolio Activities
     $900 deposits into Investing account

     $100 deposits into Lending Club account     

     Sold SPLS, +8.3% gain
     Bought 3.4936 shares of IBM @ $179.19
     Bought 42 shares of ARCP @ $14.17

Portfolio Income
Dividends

Total: $49.16
     POT: $10.85
     BLV: $2.78
     JNK: $1.43
     AAPL: $3.05
     ARCO: $5.62
     NDRO: $3.66
     PSEC: $7.51
     RKT: $3.10
     STX: 8.31
     PCY: $1.93
     Interest from cash: $0.52
Lending Club
     Interest: $4.86
Rental Income
     Townhouse 1: $855


Lending Club:  I'm also not pleased that they sit on my deposits for one week before releasing it to me to invest. I understand that they want to get some interest and have it in their accounts but come on.

Their fees are much lower then when I was with them in 2009 probably due to then I was buying and selling notes and they take extra money from the sale. I am open to the fact that I could well be wrong on the reasons for those 2009 fees but I'm not worried enough about it to look into it as that's in the past. I'm focusing on the now.
The now includes some great interest rates so I don't have too much to complain about. I'm pretty excited to see how LC turns out for me over the course of the year.

Low deposits: Had lower deposits than I had wanted this month. A positive life event happened that I wanted to take advantage of that needed money. I keep my deposits at a high % of my income so there is little wiggle room in my budget but that means that when something has to give it's my investing money. I know that some people want consistency and to keep it the same with their portfolios so make wiggle room for events. I'd rather plow as much as I can into the portfolio.

Sold SPLS: The problem with investing in a turn around story where a company that has fallen out of favor rises up to its former greatness is... when it doesn't. I wasn't comfortable at all with SPLS progress last year. They were supposed to be expanding in Europe, spending a ton on revamping their online website and expanding into more products. The money was spent but the new business has failed to come.
I had set a mental line in the sand that I cannot take a loss with this position. It got to about my entry level and the dividends were the profit. I wasn't planning on this being a trade but I also hadn't planned on losing money after nearly a year invested with them.

Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial adviser, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.

Monday, March 3, 2014

My Lending Club Strategy

Alright time to get to the reason I am in Lending Club, my strategy for making money. I've seen a lot of ideas out there involving both the primary and secondary markets, using LC for income off the interest to flipping notes for capital gains. There are lots of different ways to make money with LC so how am I going to do it?

As much as I love dividends it should be no surprise that I will be focusing in on the income. I acknowledge that one can make money flipping notes but I see mark ups of a month or two of interest payments. A strategy of funding a loan, then putting it up for sale so you can get $0.60 profit and start over isn't my idea of time well spent. Yes its risk free but I don't want to be chasing pennies.
I'd rather search for a loan so I can make $9 total interest over a 5 year loan. Its a matter of how much is my time worth in actively spent going through the LC markets.

Hold to maturity: When I find a note I want to hold it to maturity. I understand that you won't be getting as much interest as time goes on but its the same yield.
When a note is young a $0.70 payment will be $0.20 principal and $0.50 interest. Yet those last few payments are going to be reversed at $0.50 principal and only $0.20 interest. It can seem like you aren't making as much money.
Here is the thing though that I think many miss, those smaller $0.20 interest payments are on smaller amounts of principal. They are both $25 notes but one is worth $24 and has 5 years of payments left and the other is worth only $10 with a year or two left. Its not like you can sell your $25 note for a full $25. Thats not its worth its just what it started out as.
Both of these notes in my example are going to give you the same yield on the remaining principal so I am going to skip the work and time in finding the sweet spot and only taking the early months of a loan.

Secondary Market only: I have to realize I will not be in the primary market where loans get funded. I meet the requirements but I do not want to be hovering over my computer racing against everyone else to fund a loan. Even though loans are released four times a day in batches, they get funded in minutes because of the institutional investors doing automated investing. I can't blame them as they have hundreds of thousands of dollars ready to be invested. I don't want LC to be a second job for me.

Next lets talk about what type of person and note I want to be invested with...

Credit card or debt consolidation needs only: I want to be invested in the people who have hit a financial rock bottom. Where they have struggled with money have few other choices and realize the mistakes they have made. Now that might seem harsh but these people are going to be deadly serious with the loan and thusly, deadly serious with my money. I don't want the people starting a new business. I love the idea of people creating jobs and pursuing their dreams but this is an unsecured loan. If they default then I am out of luck. I don't want the people who think a $30,000 loan @ 18% interest is a good idea for their wedding. That seems like they are just beginning their debt lessons in life. I want to be at the end after they realize what lifestyle that leads to. I also do not want the person who things an 18% loan for a new deck in their back yard and remodeling is a good idea. They may have good reasons and they may be disciplined enough to handle these choices but I don't know them personally. I just have the information available so instead of taking a chance, I'll go with what seems like a safer bet.

10 months history minimum: Multiple 3rd party sites offering data from LC, bloggers, and commenters in discussions point to the majority of defaults occurring in the first year of a loan.  It makes sense why this would occur...
If people are going to scam LC and just take the money, they are going to do it early.
If people are going to use LC as a lender of last resort and are struggling with old habits they refuse to change, they are going to default early.
However if people are truly wanting to turn their financial life around and are being truthful that they can meet their current payments they just want to free up some cash, then they will never even be late with a payment.
So I want notes that have been around for 10 months and have never even been late on a payment.

Rising credit score: If a person is turning around their financial life then they either consolidated all their debt into this LC loan or they freed up cash to pay off other debt. Either way their credit score should not be dropping further and in fact should be rising. If its dropping then I take that as meaning they have other obligations they are not meeting. Perhaps they lack the discipline to pay their debts on time or they are not being smart with their money. Either way I don't want my money with those people.
The way credit scores work is that if you pay your debt on time your credit at worst stays flat. As you lower your debt to maximum allowed debt by paying them off and not taking on new debt, your score increases.
I don't think credit scores are the best indicator of a person's financial habits but its the best one available to me through LC.
I don't want flat credit score, I don't want dropping. I want rising, improving credit as proof that this person is being serious in managing their debts.

Those are the three biggest priorities for me. I have a few others that is best shown in a screenshot of my screen...

15% interest minimum. If I am avoiding the majority of defaults then I feel I can take on more risk vs the 4% loans.
Never been late.
60 month duration only.
5% mark up only. I get it that a person wants to make a little money and I am willing to meet them halfway but don't be ridiculous.
700 credit score or higher. Again, I want people who have shown they are disciplined and turned their financial life around.

As you can see from the screenshot, there are currently over 300, $25 sized notes. $7,500 available at this time. Over the course of the past month I've seen it be 300-500 so there a market for me here.

I feel that this is a very conservative screen that will avoid most, but not all, the defaults allowing me to take on the high yields for a high net yield.
Tell me what you think of this screen.

Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial adviser, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.

Wednesday, February 26, 2014

Warren Wednesday: H2 1961

Getting back on track with my Warren Wednesday series on the actual Wednesday its to come out...

H2 1961
Written: Jan 24, 1962
Length: 11 pages
SourceRPCPA.com
S&P 500 return for all of 1961: +23.13%
Buffett's return for all of 1961: +45.9%
Major events: Construction begins on the Berlin Wall. 

Roger Maris breaks Babe Ruth's home runs in a season record. 
The book Catch-22 is published. 
The Vietnam War begins for the U.S.

This letter right here is exactly why I wanted to read his letters. He really gives us a big serving of meaty portfolio management ideas. Buffett discusses how he breaks up his portfolio.
1: "Generals": Undervalued non activist securities: Companies he is passively invested in with no specific time table on when they want to sell.
5 large positions (5%-10% total assets) and 10-15 smaller ones.
He discusses how his timing of purchase is better then the timing of sales. Isn't that the truth. It is one of the few things you can control. When you get into a position and at what price.
These generals won't outperform the Dow by much but over time of several years they should.

2:  "Work-Outs": Positions requiring corporate action to unlock the profit potential. Well we have our answer as to what a work-out is that first came up in the 1959 Warren Wednesday. 10-15 workouts at a given time. Buffett mentions that he will borrow money for this section of the portfolio and I get the impression that this is the only reason he would.

3: "Control": Positions in which they control the company itself or have a big enough position to be an activist. These positions he wants to have nothing happen for possibly years while he buys up more to increase his position. Then the big payoff comes similar to the Sanborn map business from the 1960 letter.

I find this interesting that he is famous for telling people to go with your 6 or 7 best ideas because your 8th idea won't make as much money. Yet here he is in 25-30 positions excluding their "control" activist positions. It's important to keep in mind though that a person's strategy and process will change over time. For Buffett, he had a big change when Charlie Munger enters the picture. Though they met in 1959, Munger will gain more and more interaction and work with Buffett over time.

To me it appears he breaks up his portfolio based upon how much work he has to do and how much control of that work. The generals are pretty passive. Work-outs are activist that he doesn't have control over so presumably he has less he can do. Control obviously is where he is sitting on the board of directors and having to spend his time with.

On the topic of conservatism in how he doesn't jump in to high P/E companies because the market is moving up...
You will not be right simply because a large number of people momentarily agree with you. You will not be right simply because important people agree with you. In many quarters the simultaneous occurance of the two above factors is enough to make a course of action meet the test of conservatism.
You will be right, over the course of many transaction, if your hypotheses is correct, your factors are correct, and your reasoning is correct. True conservatism is only possible through knowledge and reason.
Dempster Mill Manufacturing. Buffett reveals they own 70% of the company and that there are only 150 total stockholders. To me that's very risky as there is no liquidity here to exit a position if one so wanted. His cost basis is $28 a share and book value is $75. That's quite a large margin of safety so I can understand why he went in heavy. This one position accounts for 21% of all partnership assets.

Later in this letter he again goes over their strategy of matching or struggling in a rising market but beating the Dow in a declining market. He mentions something I think is important. That his partners fully understand this not only in their cerberal regions but also in the pit of their stomach. Psychology in investing and trading is so huge, far more important than most people think. You can say you will do one thing or follow one strategy then it get tested by the markets and you fold like a house of cards.

All in all this was a great letter. I find Buffett's ideas of portfolio management as similar to mine: broken down by my work load.
My rental is managed by a property manager and I am in contact with them about every two weeks for various things however it's for getting my input and permission for various requirements.
Next is Lending Club which I just run my screen and pick some notes. Then wait for the payments to add up alongside a deposit before I buy again. This amounts to perhaps 30 minutes every two weeks.
Third is dividend investing taking up a bit more of my time in reading and researching how they are doing and looking out for any news worthy events.
Lastly is Forex. I do plan to return to it at some point but as it will be taking up most of my financial time I need to finish college first so I can have a clear head.
So I have to admit I take a little pride that I am doing some of the things Buffett did. I won't be shadowing him, that would be disastrous but the underlying concepts of what he did and why he did them is what I am after here to learn about.

Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial adviser, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.

Monday, February 24, 2014

What Lending Club is NOT

Before I get to my entry on my strategy and how I screen for loans, I wanted to talk about what Lending Club is not. There can be some misconceptions about it that I feel needs to be cleared up.

Lending Club is NOT usury.
Usury is the practice of giving a loan at immoral interest rates that the borrow cannot afford but is in no position to say no. i.e. payday loans. Going into Lending Club this was something very important to me when I saw loans went up to 25% or more in rates. Am I causing harm to people who are not in a position to say no by placing them into a worse financial situation than they already were? Would I be guilty of causing the same problems that banks did with the financial crisis of 2008? It's not important to many out there, but it is to me.

When we look into what the needs are of borrows we can see that about 75% are either debt consolidation or to pay off credit card debt. Time and again the comment section from the borrow is the same. "I ran up debt in my 20s and didn't know what I was doing. Now I have $30,000 credit card debt. I can make my payments but am not getting ahead. This loan will lower my monthly payment and free up money to start taking control of my financial life."
From that aspect I am doing these guys a favor. They are paying $7,500 a year on their 25% rate $30,000 credit card debt. Their LC loan of 18% is only $5,400. That's freeing up $175 of their monthly pay that they get to keep instead of going to a bank. This is exactly the sort of first step a family would need to turn their financial life around. $175 a month is a great start to an investing account or paying off debt quicker.

You aren't really getting 20%+ yield on your investment.
The other big thing to keep in mind with Lending Club is that you won't end up getting the yield that the loan offers.
First off these aren't qualified dividends taxed at 15% you probably are going to be paying more.
Second, Lending Club is a business and needs to make money. They make that by charging fees. In 2009 I had about a 3.5% fee on average a month though I had been selling notes on the secondary market which does have extra fees then the primary one.
Third is the secondary market mark up fee from the seller. People can charge what they want when selling their notes. If you don't want to play the F5 refresh spam game and try to beat the robot investors to fund a loan on the primary market then you have to buy notes on the secondary market. You can get some good notes with a 2%-4% mark up. That is going to lower your actual return.
The fourth reason you won't be getting the full yield on the loan is you will get less interest is if the person pays off the loan quicker. We get the interest rate of the loan on the existing principal left in the loan. If they pay extra on their loan that is less interest in the future and less profit. I enjoy seeing people get out of debt asap but it does hit your bottom line and is something to keep in mind.
Fifth and probably most importantly, you WILL get defaults. People who stop paying and your money is gone. Lending Club does a good job of following up and trying to make a payment plan with people missing payments but they aren't a collection agency. If the money is gone we are out of money. Defaults rates can be 4% or more.

The long term average for all investors with Lending Club that have 100 notes or more is 8%-9%. The 100 notes requirement is important because at anything fewer you can be really lucky with no defaults or really unlucky with a lot of defaults. Over time however, the law of averages works in the investor's favor.
Lending Club is not a get rich quick 20%+ consistent profit scheme. Its a making money slowly but surely scheme.

Lending Club has restrictions and not all investors are eligible.
As I mentioned in my previous entry, Lending Club has restrictions. Its important to keep in mind these arent Lending Club rules they're federal and state government rules about funding loans. You need to have $70,000 in annual income AND you need $70,000 liquid networth excluding your home. Additionally its only available in 27 states, two of which (KY and CA) have tougher restrictions.

Even with the above concerns and things to keep in mind, I feel Lending Club has a lot to offer and it has a place in my pre-retirement portfolio. Next I'll get into how I screen for loans and my strategy for investing with Lending Club.

Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial adviser, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.

Thursday, February 20, 2014

What is Lending Club

Last month I mentioned that I am returning to Lending Club as an investor and that I would be talking about it in February. I have made a couple deposits, done my research, and picked up some notes so want to share some finding and thoughts.

Essentially, Lending Club is a peer-to-peer money lending service that connects your average person needing money to the average person that has money to lend.
More detailed, a person applies to LC for a loan. They fill in their personal information and LC runs a credit check on them, reviews them, and if they are of prime credit score or higher they will set an interest rate ranging from 4% up to 27%. The requested loan can be in two durations: either 36 months or 60 months.

Now Lending Club does not give them the money themselves. They are merely the middle man. LC then turns the loan over to the community and opens it up to funding. That funding comes from the other users of Lending Club. In as small amount as $25, people can crowdsource the loan. Think of it as Kickstarter but your reward is getting paid back with interest. If there is enough funding to fulfill the requested amount of the loan then the person gets the money and the investor gets a note.. If the loan was for $30,000 and you put in $25 you now own 1/1200th of that loan. It can be held or sold and it will get 1/1200th of the monthly payment of the loan, which ends up being about $0.60 - $0.70.
Lending club takes about $0.01 from a $25 note as a service fee which roughly equates to 1.5% from a $0.65 payment.  This is paid by the investor as it's taken from the loan payment before it gets put into the investor's account.

There are actually two different ways to invest with Lending Club. The above description is their primary market where loans get funded. There is also a secondary market. Once you have your note it is an asset that can be sold to other people. If you have ever played an MMO and dealt with an auction hall then you have a pretty good idea of what this is about.
The secondary market is where I will be investing with Lending Club. I'll get into my specific ideas on strategies in an upcoming entry.

I first encountered LC in 2009 and back then I wasn't impressed but they were new and still trying to figure things out so I left as an investor and figured I would give them some time. Looking at them today they have changed some for the better and some for the worse.

What's better with Lending Club...
They are now more up front about the whole $70,000 income requirement. In 2009 I had to really dig deep to find this rule. Actually, I don't see it discussed very often these days so I will probably bring it up several times. The federal government requires a person to have $70,000 of yearly income to fund loans. That's not a Lending Club rule, that's a Washington D.C. rule. Presumably it's because "the poors" don't know how to calculate the risk of a $25 note and its for their protection. These days though I see it a bit more in the open at LC.
Now the secondary market is a different case. Over the counter secondary markets of selling assets isn't something that Uncle Sam seems to care about and that has no restrictions federally though it might per state. Double check if LC is available for your state.

They now offer tax forms. In 2009 they did not give you tax forms to help with you income taxes. I knew from my dividend investing that payments are income and it gets taxed. I even called LC and talked with one of their reps. I was told that they don't report income unless its $60 from a single source. That being an individual note. I asked about a $600 account limit which is pretty common for 1099-MISC forms. They didn't know anything about that. I then asked what if I had 10,000 notes each giving $0.65/month... that would be $7,800 of payments surely that would be reported. It wasn't and I was told I am on my own to calculate it what portion of the payments is a return of capital and what is actual interest. That was actually the final straw with me and I sold all my notes that week because if they weren't taking taxes seriously what else were they not serious about?

Their portfolio reporting and number crunching is more extensive and more open than before. When I was first with them they didn't offer much in the way of reporting tools for you to evaluate how you are doing. They had a net return but it was vague and involved reinvesting all your money. These days they have a lot of reports and charts to help you figure out how you are doing.


What's worse with Lending Club...
Institutional Investors. Big money has noticed LC and is stepping in. So much so that loans get funded within minutes of being applied. This is bad for a number of reasons. One, there is no question and answer back and forth with the person applying for the loan. In 2009 not all loans get funded and it often took days to get funded. Investors could ask questions like "Why did you have 12 lines of credit closed last year?" or "Why didn't you go to a bank to apply for a car loan instead of using LC for an 18% loan for a motorcycle?" Then the person asking for the loan would need to respond. Institutional investors just put in the criteria of what they want to fund and then dump tons of money into loans. The idea is that it doesn't matter what quality of loan you do as long as you hit volume it would make up for defaults. Yeah talk to pre-2008 banks about that idea. I rarely see any questions in funded loans these days.

This causes a second problem, retail investors have minutes to review and fund a loan before its completed and you miss out. I am reading that some people spam the refresh key at the four times of the day loans are released.
Luckily though the secondary market doesn't have these problems though it has others that I will discuss in my strategy entry.

All in all, I am pleased with how far Lending Club has come along. I like what they are doing, their business model, and the chance to get access to double digit yields. For the time being, I plan to run Lending Club as a side test part of my portfolio until I get 100 notes and can get a feel for default rates and actual return. Its easy for LC to say I will be getting 20% yield... before defaults come into play. I have plenty more to say in the near future about Lending Club.



Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial adviser, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.

Tuesday, February 18, 2014

Warren Wednesday: H1 1961

Quite a hectic time for me right now and thus a delay in Warren Wednesday. I'm doing the online college thing and work seems to be blowing up with mergers of teams. It's been quite the distraction but it also has reinforced why I am focusing on learning about investing: to become financially independent.
Thusly this Warren Wednesday is for last Wednesday and I'm sticking with the schedule.

H1 1961
Written: Jul 22, 1961
Length: 3 pages
SourceRPCPA.com
Dow Jones: 13%
Buffett's return:
Major events: President Eisenhower gives his final State of the Union address and warns of the power of the U.S. military-industrial complex. 

Two B-52 bombers carrying nuclear weapons crash in different accidents in the U.S.
23rd Amendment to the U.S. Constitution allows Washington D.C. residence to vote in presidential elections. They however do not have representation in Congress.
Bay of Pigs invasion of Cuba fails.
President Kennedy announces the U.S. will put a man on the moon by the end of the decade. In related news record shipments of coffee and antacids are ordered by NASA.

Warren changes over to a twice a year letter format starting with this update. He stresses that 6 months is far too short a time to measure success and would prefer to look at a 5 year time frame. Thinking about the average person today... there is no way that would be tolerated by investors and people would be pulling money away from him.

Normally I calculate the return for the S&P but I have done that yearly not half a year so will use Buffett's own comparisons on his performance. He cautions that if things keep going like they did for the first half year then he probably won't beat it.

He is so long term focused in his discussion here that he mentions a position they have that he hopes does nothing for at least a year. Presumably to buy more shares and this is something I have noticed is a problem with retail investors. We tend to make one purchase and if it doesn't go up we start getting impatient and whiney. My reply is always "So you to planned to never add to your position again? You want it to go sideways to keep buying shares then rise before you plan to cash out."
The responses I usually get is that I am a short seller trying to manipulate the market. I have to wonder if Warren ever had to deal with that.

The majority of this letter was in partnership rules, reorganization and bookkeeping but I still found it interesting to read. Buffett mentions that he is working on combining the partnerships together into one. I read is biography "The Snowball" and know that he was starting up a lot of partnerships. Often they were with different family and friends and it started to get unamanageable. He goes on to discuss how the partnership is split up and discloses some interesting things.
He will contribute 1/6th of the assets placing his personal wealth at stake alongside his investors.
He will not be buying anything else outside of the partnerships.

Perhaps most surprising to me is that he allowed a 6% monthly withdraw rate for people who want income.
For those that don't they can have the money rolled back in to increase their stake. For someone who is so adamant against paying out dividends this had to drive him nuts. He probably didn't have much choice though as these were partnerships and they had a say in what happens to the money. Not in where it's invested but in if it was to be with Buffett or someone else.

New partners needed a minimum of $25,000 to join. That is $195,000 in today's money so this was not a Joe Six Pack friendly investment.

Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial adviser, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.

Wednesday, February 5, 2014

Dividend CCC Review: January 2014

Talk of a pullback and fear of emerging market contagion is all around the net these past couple weeks. So much so that I thought I would make it a part of my monthly dividend screen.

This month the Dividend score is: Yield, 5 year dividend growth rate, Payout ratio.
Fundamental score: P/E, Tweed Factor (Yield + dividend growth rate vs P/E), and the % of price vs the 52 week low. Simply put, the closer a stock is to its 52 week low the higher the score. My thought here is wanting to find an undervalued stock but also capital preservation. If something has been beat down already its probably not going to fall much more if the market drops.

Name Symbol Industry Score Div Fund
Western Union Company WU Financial Services 10 4 6
Textainer Group  TGH Transportation 8 3 5
ConocoPhillips COP Oil & Gas 8 4 4
Chevron Corp. CVX Oil & Gas 7 3 4
IBM IBM Technology-Hardware 7 3 4
Deere & Company DE Farm Equipment 7 3 4
PetSmart Inc. PETM Retail-Specialty 6 1 5
Philip Morris International PM Tobacco 6 2 4
Rent-A-Center Inc. RCII Retail-Specialty 6 2 4
Murphy Oil Corp. MUR Oil & Gas 6 2 4
HCC Insurance Holdings HCC Insurance 6 2 4
Accenture plc ACN Business Services 6 2 4
ExxonMobil Corp. XOM Oil & Gas 6 2 4
Target Corp. TGT Retail-Discount 6 3 3
Wal-Mart Stores Inc. WMT Retail-Discount 6 3 3
Chubb Corp. CB Insurance 5 1 4
Triangle Capital Corp. TCAP BDC-Financial Services 5 1 4
AmTrust Financial Ser AFSI Financial Services 5 1 4
Rock-Tenn Company RKT Packaging 5 1 4
Ralph Lauren Corp. RL Apparel 5 2 3
El Paso Pipeline MLP EPB MLP-Oil&Gas Pipelines 5 2 3
Mattel Inc. MAT Recreation 5 2 3
BCE Inc. BCE Telecommunications 5 2 3
Occidental Petroleum OXY Oil&Gas 5 2 3
BHP Billiton Ltd. BHP Mining/Oil&Gas 5 2 3
AFLAC Inc. AFL Insurance 5 2 3
Kroger Company KR Retail-Grocery 5 2 3
Lorillard Inc. LO Tobacco 5 2 3
BHP Billiton plc BBL Mining/Oil&Gas 5 3 2
Gap Inc. GPS Retail-Clothing 5 3 2
Intel Corp. INTC Technology-Hardware 5 3 2
Helmerich & Payne Inc. HP Oil & Gas 5 3 2

My screen found a ton of new companies to review. So much so that I crossed off the usual suspects. Small banks, insurance, and China are already off the list so everything left I already own or its new.
One interesting thing I noticed, 5 of my 13 positions that are on the list are in this month's top picks. That makes me feel pretty happy going in to any potential pullback.

Companies quick to cross off...
WU: Previously crossed off. Negative EPS growth.
COP: Already invested.
CVX: Duplicate from existing investment COP. I don't want to go too heavy into a sector and because I keep an eye on my investments I want to keep my research as low as possible.
IBM: Already invested.
PM: I don't invest in tobacco. I hold no ill will or think any less of those of you that do. Just a personal choice.
RCII: Rent-A-Center: Previously crossed off.
XOM: Yet another big oil company
WMT: Already invested
TCAP: Used to be invested. Now I have PSEC and TCPC.
RKT: Already invested.
AFL: Already invested.
LO: Tobacco.
HP: Reviewed last month.

New companies for possible review...
TGH: Textainer Group: These guys take on debt, buy shipping containers, then lease them out. I like it as a play for worldwide growth but not now with emerging markets shaky. I also don't like that their debt is floating rate. Not sure if a 5% yield and 17% dividend growth rate is worth that.

DE: Deere and Company: Heavy farming equipment. They look quite undervalued at a 9.5 P/E from their history of 14. They have a 9.5% EPS growth and 16.4% dividend growth which is quite nice. I'm curious as to why the estimates are for lower EPS in 2014. Their debt/assets is rater high for me at 50%+ but I am not sure if that is standard for heavy manufacturing companies. Like most companies these days they are doing big buybacks. Looks to be about 4% a year. I might have to take a look at DE.

MUR: Murphy Oil: Oil and Gas in the USA and UK. Massive pullback or not, a 1.2% EPS 10 year average for growth is terrible.

HCC: HCC Insurance Holdings: An insurer in the U.S. and parts of Europe. I don't know if I like them in property, casualty, accident, health, surety (insurance on debt), credit, and aviation types fo insurance. That's all over the place. However their growth looks good and they appear to be undervalued at this time.

ACN: Accenture plc: Being a plc we know they are from the U.K. or Ireland. In this case they are an Irish business consulting company. They appear to be at value and I am looking for dividend yield and deeply undervalued stocks.

TGT: Target: I have recently seen a lot of bloggers jump into TGT. While I am already invested in WMT, I am strongly considering selling it. Both companies are quite comparable and TGT has an extra 0.5% yield. However I am concerned that their 2013 EPS seems 25% lower then 2012. Do any of you TGT investors know why? I'll need to find out why and figure out if its temporary.

CB: The Chubb Corporation: Yes that is the company's real name. I was actually invested with them for awhile. They are an insurance company catering to wealthy individuals and businesses. If you look at a chart you can see they have had a nice run since 2009. While they have had a nice pullback and are at their 52 week low, they are significantly over their 10.8 P/E average. Still, their 2014 EPS estimate is 30% higher then 2013 so I would not be surprised to see them up this year.

AFSI: Amtrust Financial Services: Another insurance company. What is it with my screen hitting insurance companies? AFSI has a 1.77% and that is enough to make me stick with AFL.

RL: Ralph Lauren: Never would have thought this would appear on my screen but I cannot let that bias me away from a potential investment. 1.1% yield after a nasty pullback tells me they aren't a serious dividend company. Then again they have a 37% dividend growth rate and only a 17% payout ratio. Perhaps they are. Its 10 year historic P/E is 21. That's a lot of growth expectation and RL has delivered. But if they ever stop and it gets classified as a value company its going to struggle price wise. I'll keep an eye on this one.

EPB: El Paso Pipeline. EPB is a master limited partnership. They have pipelines for oil and natural gas and act like a tollbooth for other companies transporting their energy products. I like that EPB has an 8%. That is about what I would need to pull me away from WHZ or NDRO with their double digit yields. MLPs can bought land and grow so have that going for them vs land trusts that are always declining. However I am concerned why they dropped 20% almost overnight. It has to be more then the January pullback that hit the general market.

MAT: Mattel: I recently was in Hasbro (HAS) so I find it interesting that these guys are showing up. They missed Q4 earnings by a large amount and dropped by 10%. This does though give them a 4% yield and places them back in their historic P/E range. If ever there was a clearer example of watching fundamentals it is MAT as if you look at them on Fastgraphs they keep coming back to fair value. I'll be looking at them closely as with the Q4 miss they are still expecting an increase in EPS next year.

BCE: BCE Inc: A Canadian telecom and cellphone company. 5.4% yield looks nice and they do appear to have had a nice pullback. I'd have to see if they have international exposure. I don't see much growth for U.S. and Canadian cellphone markets. Its not like thats a brand new tech about to sign up a lot of new customers.

OXY: Occidental Petroleum Corp: A large U.S. oil company but not imo part of Big Oil (XOM, COP, CVX). Even with their recent pullback, Fastgraphs shows them overvalued by their metrics and by a historic P/E ratio.

BHP: BHP Billiton Limited: A mining company taht has erratic but overall climbing EPS. Averaging 21% EPS growth a year. This Billiton is out of Australia. Funny storry with BHP and BBL. They were separate mining companies, one from Australia and one from the U.K. They merged but kept their serparate ticker symbols. So they are the same company but their stock behaves differently. Their yields can also differ by 0.5% or so. BHP is interesting in that they are jumping in on the potash bandwagon and working on a multi billion dollar mine. It wont be available until 2017 or 2018 but they are moving forward. Might be a challenge for my POT so I will need to keep an eye on them. They look extremely undervalued and I need to look into them.

KR: Kroger: Grocery store chain. KR is a company I have on my watch list and they score extremely high on my system. Their recent pullback has put them very undervalued. A 2% yield is rough but perhaps this could be a trade vs a dividend investment. A 10% EPS growth rate and a 15% dividend growth rate at least warrants research.

BBL: BHP Billiton plc: The U.K. side BHP. My thoughts are listed above.

GPS: The Gap: With a 2% yield, 6.7% dividend growth rate and a 21% payout ratio they easily have more room to be paying a dividend but aren't. To me that seems like they aren't committed to a dividend so I will pass.

INTC: Intel: Though this is the first time they have been on my screen, I have researched them in the past. They are a value trap that looks good but is struggling. They were too late to get on the mobile bandwagon and have paid the penalty ever since with years of declining EPS.

This month's research screen winner is...
PETM: Petsmart Inc: Lots of interesting candidates for the best company for my screen to research but it goes to PETM. As with RL, I wouldn't have thought Petsmart would be a company I might invest in. First off they have had consistent EPS growth of 13.6% a year with only a minor dip in 2008 which they recovered. Along with pet supplies they also have pet grooming and kennel options. They also have some veternarian options in some of their stores. Their 1.2% yield is at first troubling but then you see they have a 35% dividend growth rate... they aren't afraid to throw cash our way.
In 2007 they paid $0.12 a year and had share price in the low $20s... a measly 0.6% yield.
Today they pay $0.76 a year with a $63 share price a 1.24% yield however thats a 3.8% yield on cost. Oh and a share price rise that outpaces the S&P by a huge margin.
I'll be researching PETM more closely.



For your consideration. Here is an unfiltered list of companies within 5% of their 52week low, essentially at the bottom. Some might be duplicate from above and some are of pretty low quality but for any of you interested in getting decent companies that have dropped by a large amount...

Name Symbol Industry Score Div Fund
Chesapeake Fin CPKF Banking 8 4 4
Chevron Corp. CVX Oil & Gas 7 3 4
IBM IBM Technology-Hardware 7 3 4
Philip Morris Int PM Tobacco 6 2 4
Target Corp. TGT Retail-Discount 6 3 3
CCFNB Bancorp Inc. CCFN Banking 6 2 4
China Mobile Limited CHL Telecommunications 6 2 4
PetSmart Inc. PETM Retail-Specialty 6 1 5
Rent-A-Center Inc. RCII Retail-Specialty 6 2 4
W.R. Berkley Corp. WRB Insurance 5 1 4
RLI Corp. RLI Insurance 5 2 3
Ralph Lauren Corp. RL Apparel 5 2 3
El Paso Pipeline MLP EPB MLP-Oil&Gas Pipelines 5 2 3
Aaron's Inc. AAN Retail-Rental 4 1 3
Excel Trust Inc. EXL REIT-Diversified 4 2 2
McDonald's Corp. MCD Restaurants 4 2 2
First Keystone Corp. FKYS Banking 3 -1 4
Syngenta AG SYT Agriculture 3 1 2
Brady Corp. BRC Business Services 1 -1 2
Orange County Banc OCBI Banking 1 -1 2
Consolidated Edison ED Utility-Electric 1 -2 3
South Jersey Ind SJI Utility-Gas 0 1 -1
Fastenal Company FAST Building Materials -1 -1 0
Cenovus Energy Inc. CVE Oil&Gas -1 -1 0
Erie Indemnity Co ERIE Insurance -1 0 -1
Hawkins Inc. HWKN Chemical-Specialty -2 -1 -1
Kellogg Company K Food Processing -2 -2 0
WGL Holdings Inc. WGL Utility-Gas -3 -2 -1
Boardwalk Pipeline MLP BWP MLP-Natural Gas -3 -2 -1
AT&T Inc. T Telecommunications -3 -2 -1
Southern Company SO Utility-Electric -3 -2 -1


Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial adviser, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.