Sunday, May 29, 2011

A Club for Lending (Part 2): Battle Royale

Last week I put up a quick, descriptive post on P2P lending (here is another introductory article on P2P lending).  Now I’ll go into a little more detail.

Why did I choose Lending Club over Prosper?  A few different reasons, but they’re all related to my confidence in Prosper succeeding as a business.  Prosper is currently under litigation in a class action lawsuit for allegedly selling unqualified and unregistered securities (more info).  The case has not yet been resolved. 

Furthermore, Prosper uses more lax requirements for borrowers than Lending Club.  Prosper had a relaunch in July 2009 where it tightened credit requirements that lead to a lower default rate, but the numbers before that are quite scary (and Prosper still has looser credit requirements than Lending Club).  Indeed, more than half of Prosper investors lost money due to more than 22% of all money borrowed being charged off (that is, borrowers stopped making payments). 

To add on to this, there are currently ongoing concerns over the solvency of Prosper.  The loans originated on these P2P lending sites will still exist even if the site shuts down, but I want to put my money with the company that looks to be on the upswing, not one that looks dangerous and on the verge of bankruptcy (#3 on this list of the risks of P2P lending, from Social Lending Network).

Compare this to Lending Club, where over 90% of loan applications are declined due to not passing requirements.  Because of this, defaults throughout the history of the site remain less than 3% (even through the financial crisis), with over 90% of investors making money, averaging 9.64% net annualized return since inception in 2007.  Now I use my own filters to pick out loans, and I could use those same filters that I have on Lending Club on Prosper.  But I want my filters to find loans that are the crème de la crème, not the crème de la crap.

I’m being a bit harsh.  If Prosper improves its financial footing, I may put some money in the site.  I do like having Prosper around as competition to Lending Club because Prosper has features that I want Lending Club to incorporate, such as the ability to filter for previous borrowers, who are extremely likely to pay back their loans in full.

Okay, now that we have that squared away, how does Lending Club actually make money?  Pretty simple, really.   Borrowers pay a one-time processing fee from 2.25% to 4.50% of their loans, while investors pay a 1% service charge on each payment received from borrowers.  I actually prefer to have to pay a 1% service charge.  Why?  Because that means Lending Club has a vested interest (getting paid) in picking out quality loans.  Cool.

Next week I’ll show you the filters I have to choose loans and the results I’ve had so far.  This might take a couple weeks because I use a lot of filters and want to explain each one at least a little bit.

The information available at Michael Grabowski is for your general information only and is not intended to address your particular requirements.  This information is not any form of advice by Michael Grabowski and is not intended to be relied upon by users in making any investment decisions.  Michael Grabowski is not liable for any loss or damage which may arise directly or indirectly from use of or reliance on such information.

Sunday, May 22, 2011

A Club for Lending (Part 1)

Recently I stumbled upon the world of P2P (peer-to-peer) lending.  Just like P2P downloading is when users upload and download from each other without the usual intermediaries, P2P lending allows individuals to borrow and lend from each other without a traditional financial intermediary (read: a bank).  Not having to deal with a bank could be a big win for both the borrower and the lender.  How?

Let’s look at a simple example of two guys, Frank and Dave.  Frank has $20,000 in credit card debt at a 20% annual interest rate, so he pays $4,000 in interest per year.  Frank has good credit so he applied for a $20,000 loan from his local bank.  The bank approves the loan at a 15% interest rate, and Frank uses the loan from his bank to pay off his credit cards.  Now Frank’s credit cards are paid off and he owes the bank $20,000 at a 15% interest rate, so he only pays $3,000 in interest per year, coming out $1,000 ahead.

Dave has $20,000 to invest.  He signs up for a 3 year CD at his local bank that pays 1.5% interest annually.  Dave makes $300 in interest per year on his CD.

What P2P lending sites such as Lending Club and Prosper do is cut out the middleman, the bank.  Borrowers like Frank apply for loans on these sites, and the sites vet them and decide if they are credit worthy (Lending Club is fairly strict in its requirements, less than 10% of borrowers are accepted).  Then, the site selects an interest rate appropriate to how much credit risk the borrower has.  Say a borrower has had defaults, a low FICO score, and a high revolving credit balance.  This borrower will have to pay a higher interest rate on their loan because they represent a higher risk to lenders.

Now suppose Frank applies to Lending Club for his loan instead of his local bank.  Because he has good credit, Frank gets an interest rate of only 10% on his $20,000 loan.  Now instead of paying $4,000 in interest to the credit card companies or $3,000 in interest to the bank after refinancing, Frank only pays $2,000 per year in interest to Lending Club (who then pays the individual lenders who decided to fund the loan on the site).

Dave sees Frank’s loan on Lending Club and decides to fund the whole thing.  Now instead of earning only $300 in interest per year using a $20,000 CD, Dave earns $2,000 per year on interest (however, unlike when Dave invested in a CD, Dave now has risk of Frank defaulting on his loan).  If Frank does not default, both the borrower and lender come out ahead by foregoing the bank.

Of course, this is a pretty big oversimplification.  In reality, lenders like Dave greatly diversify the loans they invest in P2P lending.  The minimum that can be invested in a loan is $25 on Lending Club and often lenders invest that amount in every loan that passes their requirements.  In this case, if Dave invested his $20,000 he would be part of 800 separate loans.  Indeed that’s one of the biggest draws of these P2P sites, the ability to quickly and broadly diversify across loan types.  Lending Club boasts that 90.36% of Lending Club investors with over 800 notes earn between 6% and 18% on their investments.  The average return has been 9.64% since the start of the site, including defaults (more on defaults in next week’s post).  This average return is pretty high and one of the biggest factors that drew me into P2P lending.

Because I have extra cash on hand, I’ll be looking to join P2P lending on the investing side, not borrowing.  However, if I needed a loan I would definitely apply to these sites and compare their interest rates against banks.

Next week, I’ll look at the risks and rewards of P2P lending and why I chose Lending Club over Prosper (even though I’m very happy to have competition around).

The information available at Michael Grabowski is for your general information only and is not intended to address your particular requirements.  This information is not any form of advice by Michael Grabowski and is not intended to be relied upon by users in making any investment decisions.  Michael Grabowski is not liable for any loss or damage which may arise directly or indirectly from use of or reliance on such information.

Sunday, May 15, 2011

The Internet and the Old Maid (Part 3): Odds and Ends

In the third and final post on this topic, we’ll wrap up some loose ends.  At the time of this writing, the top rated comment on Katy Perry’s song “Firework” on YouTube says

176,150,854 views.. Katy Perry made around $100 million for this video/song. SHE DESERVES IT a very inspiring song

I think that estimate is a little high, to say the least.  I find it hard believing that either Katy Perry or her record company, Capitol Records, make $.57 per hit on a YouTube video.  The information is hard to find, however.  People who sign up with YouTube as YouTube Partners are not allowed to publicly disclose their revenue, which I think is a silly rule.  And because of this, you find widely different values for revenues from YouTube.

There used to be a site named that would attempt to document this.  It looks the site is down, probably shut down by YouTube.  This post goes into a little detail about how generated its statistics, but long story short: certain statistics such as views, comments, and subscriptions per day are all accurate, but the daily gross is still a guess.

I started chasing my tail a bit with this post by trying to find accurate incomes for YouTube partners.  At the end of the day, it’s clear that people are making their living posting videos on YouTube, and that’s pretty cool.  What’s even cooler is that for a lot of these content creators, they’re happy where they are and with their independence.

In the past, the only reason to self-publish a book was to get noticed by the legacy publishers.  Self-publishing anything was a means to an end.  Now people are controlling the entire creation process and making their livings doing that.  Sure, freddiew is now featuring movie stars in videos and a lot of the big name YouTubers would jump at the chance to sign with a big studio (is this “selling out”?  Who cares, it’s their decision).  But one thing is certain, the Internet has allowed self-publishers a place to stay and flourish, without kowtowing to the whims of the old gatekeepers.  Awesome.

Now, without further ado, some of my favorite YouTube content from small guy content creators:

Bed Intruder, the most-viewed YouTube video of 2010 excluding major label music videos, and Auto-Tune the News #5, my favorite in the Auto-Tune the News series, both from schmoyoho

Aimbot, a video exploring the use of an aimbot in real life, from the action-oriented freddiew

Darth Vader vs Hitler and Einstein vs Stephen Hawking in the Epic Rap Battles of History series by nicepeter

Fails of the Weak, a weekly series of Halo fails by RoosterTeeth (of Red vs Blue fame)

Dock Ellis & The LSD No-No, exploring the underreported world of performance inhibiting drugs, by NoMasTV

Sunday, May 8, 2011

The Internet and the Old Maid (Part 2): Dollars and Cents

One of the main reasons I started this blog was inspiration from this conversation between two authors, Barry Eisler and Joe Konrath.  Their post is long and full of a lot of back-patting, but money talks: Barry Eisler turned down $500,000 from a legacy publisher so that he could self-publish his next book.  If an author self-publishes he keeps 70% of the revenue from selling an ebook on Amazon (he also gets a $0 advance).  These two gentlemen now find that more attractive than even large advances from legacy publishers coupled with a much smaller percentage of revenue, now 14.9% for ebooks.  They are cutting out the middle man, the old gatekeeper.  Awesome.  Simply put:

Joe: Or to put it another way, getting half a million bucks and 14.9% royalties, forever, isn't as lucrative as no money up front and 70% royalties, forever.

This sets up a nice, easy equation.  For the sake of simplicity, assume Barry’s ebook is sold for $10.  So he gets $500,000 and $1.49 per book under the legacy publisher, or no advance and $7 per book if he self-publishes.  Then, simply solve:

    Legacy Publisher           Self-Publishing
$500,000 + $ 1.49 * x    =    $0 + $7 * x

to find

x = 90,774 books for Barry to make the same amount self-publishing versus legacy publishing (~$635,000). After this number, self-publishing runs away with it.  For every 100,000 more ebooks Barry sells, he makes over $500,000 self-publishing over a contract with legacy publishing.

Barry put his money where his mouth is so it’s clear that he thinks he’ll come out ahead self-publishing.  And he also put forth a bunch of stats and percentages, so you can fiddle around with the numbers and see for yourself.  But a lot of the numbers even in this brave new world are still hidden.  I can see the top-selling ebooks on Amazon, but I can’t see their total amounts.  I know that successful bloggers such as J.D. Roth from Get Rich Slowly and Trent Hamm from The Simple Dollar use their blogs as their primary incomes, but I don’t know what that income is

That’s not to say that these bloggers should or have an obligation to publish their incomes, but it would be interesting to examine, especially month-to-month variations.  I would also be apprehensive about broadcasting my primary income, but I have no qualms about reporting my blogging income.  It will especially interesting to see as the site grows.  So, without further ado, here is my April income from this blog:

$.87!  Not much money (and I made it off one click), but I expected it to be even lower.  Not too shabby for a blog that was started at the end of March.  I’ll report blogging income monthly.  This will at least provide a little data (or right now, datum) in the world of Internet self-publishing. 

An aside: I know that you’re supposed to file taxes quarterly for self-employed income.  I’ll probably make a post about this as I prepare to do it in the future.

Sunday, May 1, 2011

The Internet and the Old Maid (Part 1)

Netflix now officially has more subscribers than Comcast.  Click here and read the title if you don’t believe me.  While it’s not exactly an apples to apples comparison, it still warms the cockles of my cold, black heart to hear news like this.  To me, it’s a sign of the times.  The old gatekeepers of content will lose their power or be forced to adapt.  Either way, consumers win.  Awesome.

What exactly did old media provide?  First and foremost, they were publishers.  They filtered through the crap and put shows on TV, songs on the radio, movies on the film screen, etc.  That’s fine, but they used and still use their massive size to cross-promote crap.  If I’m watching a baseball game, there’s an approximately 0% chance that I want to hear about The Real Housewives of Orange County.  Much, much worse though is that their filters for content are not that good.

Take the case of Norm Macdonald.  As an aside, he has a new show that’s pretty good on Comedy Central, but I can’t watch it easily online.  I don’t own a television (and because I don’t, I’m legally obligated to mention it in every conversation), so it’s a pain in the ass to try to watch Norm’s new show.  The Colbert Report, The Daily Show, and Southpark all have all their episodes online, but that’s not the case for other Comedy Central programming like Tosh.0 or Sports Show.  Why, old media, why?

But I digress.  Back in the 90s, Norm was riding high on SNL.  He was definitely a blue comedian and his humor was not for everyone.  Especially, not NBC executive Don Ohlmeyer.  Ohlmeyer fired Norm in 1997.  There are a lot of reasons that are put out there to explain the firing, but my favorite conspiracy theory is that Ohlmeyer and O.J. Simpson were good friends and that Norm was relentless with O.J. jokes.  After O.J. was found not guilty, Norm opened up with, “Well, it’s official.  Murder is legal in the state of California.”

The reasons for the firing aren’t as important as the fact that a lot of people still wanted to watch Norm perform, but could not.  After he was fired, Norm said he wasn’t allowed to work on other shows.  Old media reigned supreme, and the consumer suffered.

This is a pretty stark example, but even more nefarious are the subtle (or not so subtle) changes that old media forces upon content creators.  This is the reason we see the same crap year after year.  People are coming up with new and creative ideas, presenting them to old media, and old media sees that they’re good.  The new ideas just need a few small itty, bitty changes to make the new shows more similar to the successful old ones…

Would I do a better job filling the shoes of old media?  Probably not.  Now, filtering is hard.  Figuring out what will be a hit and what will be a bomb is certainly difficult.  As Stephen Dubner (of Freakonomics fame) reports at concerning the NFL draft:

But there's a dirty little secret that most people won't acknowledge, or don't even recognize. Selecting a player in the draft is essentially trying to predict the future, and human beings are simply not very good at it.

How do we know this?

First of all, there's this quote from Niels Bohr, the Nobel-winning physicist: "Prediction is very difficult, especially about the future." But don't take Bohr's word for it. Let's look at evidence from a couple of fields unrelated to the NFL draft: finance and politics.

In recent years, academic researchers have been charting the predictions made by high-ranking experts in those fields. What they've found is quite sobering. When it comes to describing how the future will unfold, the typical financial or political expert does about as well as a monkey with a dartboard. Even more sobering, experts who have a particular concentration of knowledge do even worse in that area; and the more famous an expert, the more likely he is to fail.

So people, and even (or especially?) experts are bad at predicting the future.  What will the American public love (Inception?  Seems too complicated), what will they hate (Atlas Shrugged Part 1?  Sure, now’s the time to capitalize on Ayn Rand and the tea partiers!)
, and what will they love to hate (Friday by Rebecca Black)?

That last link is what really gets to the heart of the matter.  Friday by Rebecca Black has over 125 million views by the time of this writing (and only ~350,000 likes compared to ~2,500,000 dislikes).  If Rebecca Black had written and performed Friday 10 years ago she would have been laughed out of the studio and the only people to have heard the song would have been her parents.  A lot of people would say that’s a good thing, but I disagree completely.

One of the greatest advancements of the Internet is that we filter our own shit, just like tilapia on a fish farm.  Sure, there are still big content producers.  But now the little guy is making stuff that is directly viewed by other little guys, without the old gatekeepers in the way.  And we decide what we like (or at least what we like to make fun of, in the case Ms. Black).

It’s not that the Internet acts as a great filter.  In fact, one could argue that it’s a poor one.  If you go on YouTube, there are millions and millions of videos with less than a hundred views.  99.9% are pure crap, but if we have to filter our own shit just so we don’t lose access to one more Norm Macdonald, I’ll consider it a huge win.  On the other hand, the top viewed or top rated of the day on YouTube are usually reasonably high quality fare.  So if consumers apply their own filters, they can find the good stuff without the need of the old gatekeepers and without the loss of the few diamonds in the rough.

And anyway, I take great pride in finding videos that have very few views that go on to rack up millions.  Is this deranged?  Probably, but every time I see a "Golden Voice" Homeless Man before he hits it big, I get a warm, fuzzy feeling inside.

Next week I’ll look at some little guy content creators who made it big without the need of the old gatekeepers.