Peer to peer lending has grown dramatically the last few years in the USA. The largest platforms are Lending Club (you get a $25 bonus if you sign up with this link – I don’t think I get anything?) and Prosper. I finally tried out Lending Club starting about 6 months ago. The idea is very simple, you buy fractional portions of personal loans. The loans are largely to consolidate debts and also for things such as a home improvement, major purchase, health care, etc.).
With each loan you may lend as little as $25. Lending Club (and Prosper) deal with all the underwriting, collecting payments etc.. Lending Club takes 1% of payments as a fee charged to the lenders (they also take fees from the borrowers).
Borrowers can make prepayments without penalty. Lending Club waives the 1% fee on prepayments made in the first year. This may seem a minor point, and it is really, but a bit less minor than I would have guessed. I have had 2% of loans prepaid with only an average of 3 months holding time so far – much higher than I would have guessed.
On each loan you receive the payments (less a 1% fee to Lending Club) as they are made each month. Those payments include principle and interest.
This chart shows the historical performance by grade for all issued loans that were issued 18 months or more before the last day of the most recently completed quarter. Adjusted Net Annualized Return (“Adjusted NAR”) is a cumulative, annualized measure of the return on all of the money invested in loans over the life of those loans, with an adjustment for estimated future losses. From LendingClub web site Nov 2015, see their site for updated data.
Lending Club provides you a calculated interest rate based on your actual portfolio. This is nice but it is a bit overstated in that they calculate the rate based only on invested funds. So funds that are not allocated to a loan (while they earn no interest) are not factored in to your return (though they actually reduce your return). And even once funds are allocated the actual loan can take quite some time to be issued. Some are issued within a day but also I have had many take weeks to issue (and some will fail to issue after weeks of sitting idle). I wouldn’t be surprised if Lending Club doesn’t start considering funds invested until the loan is issued (which again would inflate your reported return compared to a real return), but I am not sure how Lending Club factors it in.
Google and Amazon were star performers in the last 4 months with Google up $127 billion and Amazon increasing $96 billion moving Amazon from outside the top 20 into 8th place. Facebook increased in value by $64 billion and moved from the 18th largest market cap to 7th. The China market declined quite rapidly since June and the largest Chinese companies saw significant drops in market cap.
Industrial & Commercial Bank of China and China Mobile dropped from the top 10 (replaced by Facebook and Amazon). That results in USA companies holding the top 10 spots (the next 5 are either Chinese or Swiss).
The next ten most valuable companies:
Company
Country
Market Capitalization
11
Industrial & Commercial Bank of China
China
$250 billion*
12
China Mobile
China
$247 billion
13
Novartis
Switzerland
$243 billion
14
Petro China
China
$241 billion
15
Nestle
Switzerland
$241 billion
16
JPMorgan Chase
USA
$241 billion
17
Hoffmann-La Roche
Switzerland
$231 billion
18
Pfizer
USA
$214 billion
19
Toyota
Japan
$211 billion
20
Procter & Gamble
USA
$210 billion
Market capitalization shown are of the close of business October 30th, as shown on Google Finance.
The 11th to 20th most valuable companies includes 3 Chinese companies, 3 USA companies, 3 Swiss companies and 1 Japanese company. Alibaba, Tencent, China Construction Bank and Walmart dropped out of the top 20 (replaced by Amazon, Pfizer, Proctor & Gamble and Toyota). Alibaba remained above $200 in market cap making it the only company worth more than 200 billion that missed the cut. In the top 20 the USA gained 2 spots, China lost 3 and Japan gained 1.
The number of USA households spending more than 50% of their income on rent is expected to rise at least 11% to 13.1 million by 2025, according to new research by Harvard University’s Joint Center for Housing Studies and Enterprise Community Partners.
The findings suggest that even if trends in incomes and rents turn more favorable, a variety of demographic forces—including the rapid growth of minority and senior populations—will exert continued upward pressure on the number of severely cost-burdened renters.
Under the report’s base case scenario for 2015-2025, the number of severely burdened households aged 65-74 and those aged 75 and older rise by 42% (830,000 to 1.2 million) and 39% (890,000 to 1.2 million); the number of Hispanic households with severe renter burdens increases 27% (2.6 million to 3.4 million); and the number of severely burdened single-person households jumps by 12% (5.1 million to 5.7 million).
Graph from the report. The blip of an improvement from 2010 to 2013 is due to the decline in home ownership which changed the makeup of the “rental population.” Moderate (severe)
burdens are defined as housing costs of 30–50% (more than 50%) of household income. Households with zero or negative income are assumed 30 to be severely burdened, while renters not paying cash rent are assumed to be unburdened.
Enterprise Community Partners argues for more government action on affordable housing. I am worried about such efforts being done in a sensible way but I do agree with the concept of supporting affordable housing. I would use zoning to require affordable housing construction along with market rate housing.
Doing such things well requires a government that is not corrupt and fairly competent which isn’t so easy looking across the USA (unfortunately). An example of somewhere that does this fairly well is Arlington Country, Virginia (which also has a good non-profit focused on affordable housing). Good non-profits can play a vital part in affordable housing over the long term.
My comments on a post by Kiva about their decision to end the Kiva Zip (direct to people loans – no intermediary financial institution) program in Kenya.
Thanks for your efforts and the explanation. I am very happy Kiva is trying new ideas (like Kiva Zip). I also think it is important to evaluate those efforts and when they don’t work as well as desired attempt to improve but if things still lag pull the plug. I was happy to have made several Kiva Zip loans to Kenya (and elsewhere).
I do think it is very important to retain an infrastructure for those people you got to try the new effort with, as I believe Kiva will. This has to be part of any innovation efforts – a budget to include unwinding the effort in a way that is in keeping with Kiva’s mission to help people. I strongly believe in efforts to avoid abandoning those who worked with you in general, but for those taking loans from Kiva it is much more important than normal.
Keep up the good work. And keep challenging Kiva to get better and not get complacent when things are not going as well as they should. I am happy to continue to lend to Kiva but I also am concerned that the focus on making a difference and making people’s lives better can be lost in the desire to grow.
The Curious Cats group on Kiva has made over $27,000 in loans to entrepreneurs around the world (the way Kiva works the groups, they don’t include Kiva Zip loans). You can join us. I believe in the model of micro-finance (Investing in the Poorest of the Poor [this one is grants instead of loans]), though I also believe we need more data on real experience of borrowers. Kiva Zip gives loans directly to people with a 0% interest rate. Normal Kiva loans have financial institutions (some of which are charities but they still have expenses) make the loans and Kiva lenders provide capital (at 0%) but the borrowers have to pay interest (the idea is they pay lower interest since the financial institution has a 0% cost of capital).
When you sell your primary residence in the USA you are able to exclude $250,000 in capital gains (or $500,000 if you file jointly). The primary test of whether it is your primary residence is if you lived there 2 of the last 5 years (see more details from the IRS). You can’t repeat this exemption for 2 years (I believe).
It doesn’t matter if you buy another house or not, that exclusion of up to $250,000 is all that can be excluded (you must pay tax on anything above that amount – taxed at capital gains rates for long term gains).
For investment property you can do 1031 exchanges which defers capital gains taxes. Otherwise capital gains will be taxed as you would expect (as capital gains).
When you inherit a house the tax basis will be “stepped up” to the current market rate. So if you then sell your basis isn’t what the owner paid for it, but what it was worth when it was given to you.
Apple’s market cap is up $115 billion since the last list was created in October of 2014. That increase is more than 50% of the value of the 14th most valuable company in the world (in October 2014).
China Mobile increased $100 billion and moved into 6th place. Industrial and Commercial Bank of China (ICBC) increased $78 billion to move into 7th place.
Exxon Mobil lost over $50 billion (oil prices collapsed as OPEC decided to stop attempting to hold back supply in order to maximize the price of oil). Alibaba (the only non-USA company in the last list) and Walmart dropped out of the top 10.
The total value of the top 20 increased from $5.722 trillion to $6.046 trillion, an increase of $324 billion. Several companies have been replaced in the new top 20 list.
The next ten most valuable companies:
Company
Country
Market Capitalization
11
JPMorgan Chase
USA
$250 billion
12
China Construction Bank
China
$250 billion**
13
Novartis (NVS)
Switzerland
$246 billion
14
Petro China
China
$237 billion
15
Wal-Mart
USA
$236 billion
16
Tencent
China
$235 billion**
17
Nestle
Switzerland
$235 billion***
18
Facebook
USA
$231 billion
19
Hoffmann-La Roche (ROG.VX)
Switzerland
$231 billion
20
Alibaba
China
$226 billion
Market capitalization shown are of the close of business last Friday, as shown on Yahoo Finance.
The current top 10 includes 8 USA companies and 2 Chinese companies. The 11th to 20th most valuable companies includes 4 Chinese companies, 3 Swiss companies and 3 USA companies. Facebook (after increasing $21 billion), China Construction Bank (increasing $68 billion – it is hard for me to be sure what the value is, I am not sure I am reading the statements correctly but this is my best guess) and Tencent moved into the top 20; which dropped Procter & Gamble, Royal Dutch Shell and Chevron from the top 20.
The value of being able to use the time you are moving to your destination instead of concentrating on driving is huge. And the reduction in deaths, serious injuries, injuries, damages, frustration and waste of time caused by accidents will be a huge benefit to society. Many people attempting to focus on phone calls or whatever else instead of driving create lots of that damage due to accidents.
There will also be big restructuring in how the economy works. Car sharing (such as Zipcar) will greatly increase I think and Uber and Lyft will likely be big players in a move to driverless cars. It sure seems like fewer cars will be needed. Space wasted on parking cars should be greatly reduced. Deliveries will likely see big changes. The impact on the economy will be huge. Even the health care system may see billions in savings.
Toyota is an amazingly well managed company. They should capitalize on any important shifts in the auto industry. But will they do so for driverless cars? Will there be a decrease in demand for cars so large that Toyota losses more than it wins? My guess is the decrease in demand globally will not be huge for the next 10 years (of course I could be wrong). My guess is Toyota will do well, but may be caught a bit behind, but then will come back strongly.
For those that don’t think Toyota can innovate, remember the Prius. Also they have been big investors in robots. That they haven’t turned robots into a big business yet though may be a sign of weakness (related to turning innovation into business profits).
I think Toyota will do the best of the large traditional car companies at taking advantage of this opportunity. Honda would be my second pick.
Google has been at the forefront of the driverless car efforts; I first wrote about self driving cars in 2010 about Google’s efforts (on my Curious Cat Engineering Blog). They are willing to take big gambles. They have a very good engineering culture. They are very profitable. They haven’t done much at creating profitable businesses outside of search and ads though. Still I think they may be huge winners in this area. I would guess by licensing technology to others, but things are involving quickly we will see how it plays out.
Tesla has a great engineering culture with a priority given on innovation and customer focus. They are in the car industry though I don’t lump them with the “traditional car companies.” I give weight to the value Elon Musk will bring them. They have big potential to be one of the big winners in a self driving car future. But they have yet to create much profit. Will they be able to turn promising engineering and leadership into a huge business? I think the odds are good but that is still a difficult challenge. Others have much more money than Tesla. Apple has so much money they could even buy Tesla easily.
“maybe five or six years from now I think we’ll be able to achieve true autonomous driving where you could literally get in the car, go to sleep and wake up at your destination,” Musk said. He added that it may take a few years beyond the point when the technology is ready for regulators to sign off on it.
Musk also stressed that the new Tesla autopilot system, which uses radar, ultrasonic sensing and cameras to create a sort of super-smart cruise control, obstacle avoidance and lane-keeping system, is not the same as a self-driving car.
Apple seems like a long shot to me. It doesn’t seem like the type of business Apple has gone into in the past. The argument for doing so is the huge pile of cash they have (over $170 billion which is an absolutely huge number – it is also a bit fake in that they have started borrowing tens of billions instead of spending that cash). The moves with the cash are based on 2 circumstances. First they would have to pay large amounts of taxes to use that cash in the USA (taxes are delayed as long as they hold it overseas). And second interest rates are so low, borrowing money hardly costs them anything.
I continue to believe the choices for investors are much more challenging than they normally are, as I have written about several times. Though maybe soon, this will just be the new normal (in which case investors won’t have the fairly easy choices they have had for much of the last 100 years).
There are many advantages to city property, in the right city. When I was looking at my first house I looked for something that would be easy to rent out. The most important factor to minimize vacancy is high demand. If there is high demand, the worst you should face is the need to lower your asking price.
An additional consideration in buying condos (your only option in large urban centers like New York City, seen in my photo of the Empire State Building) are condo fees. Fees and taxes can make positive cash flow a challenge and they continue when the property is vacant thus creating more risk for the investor. Of course, in popular markets and good times rents are very attractive for owners and price increases can make them great investments.
During downturns rental property that is not in high demand can be vacant no matter the price. And those properties with some, but not overwhelming, demand will face the need for dramatic rent decreases to minimize vacancy (and large declines if you need to sell). My purchase was 3 blocks from a metro stop (close in to Washington DC). All housing near metro stops in DC have high demand and that close in to the city has even higher demand.
In over 10 years I have had maybe 2 months of vacancy – the first year I messed up; I was new to trying to rent places out and believed people were going to sign the lease because they said they would but then they backed out. I think I may have had 1 more month sometime, but maybe not, I can’t really remember.
I have considered tourist property but have decided against it so far. The rental yield are higher but you have higher vacancy rates, which is manageable, but also much more property management issues to deal with. In order to cope with that you need to hire a property manager, very carefully. You need to carefully check their experience, reliability and competence.
And even for residential real estate the hassles of dealing with the property management yourself may lead investors to use property managers. This cuts into the advantages of direct real estate investments and so if you are going to use property managers then looking at REITs has to be considered. I believe if you are sensible direct real estate investments would normally return more but the risks are significantly higher and the hassle is somewhat to significantly higher. Likely the decision on whether to use direct real estate investing is more about personal preference than just a decision on which option would be a better investment.
What is your strategy when choosing stocks and investments?
John Hunter: I look for good individual investments, but I also weigh my guesses about long term macroeconomic conditions in making investment commitments. I think there is much more risk to the drastic measures central banks have been making for the past few years than the market is factoring in. I think the poor job regulating risk in the financial system is also very risky at the macroeconomic level.
I don’t have any real idea of what the chance of massive economic failure is, but I am much more worried today than I have been. Pretty much, my worry has remained the same over the last few years. We did avoid an immediate meltdown, though we still had plenty of economic pain. Yet, in my opinion, the risk has remained very high for the last few years, but people seem to think central banks can continue this extraordinary behavior without consequences; I see a great deal of risk in the economy.
…
Three macro-economic factors make healthcare an appealing investment. First, the aging population should provide a booming market. Second, the huge increase in rich people globally that can afford very expensive medicine again provides an ever-growing market. Third, the broken healthcare system in the USA results in exceedingly high-priced medical care in a very large and rich market.
I also close out the interview with some tips I have shared on this blog over the years
If there was one piece of advice you’d like to impart to your readers, what would it be?
John Hunter: I can’t pick one, but I can pick a few short pieces of advice:
Minimize costs on investments, use Vanguard or similar low fee funds. Buying individual stocks reduces even the costs of Vanguard. There are tradeoffs to diversity of your portfolio when buying individual stocks.
Pay attention to the overall risk of the portfolio, and even beyond that, your entire financial picture. For example, in the USA we have extra healthcare expense risk that is outside our portfolio risk, but is part of our entire financial picture. Building your portfolio with extra-portfolio risks in mind is wise. Don’t get fooled into thinking about the risks of investments taken individually, even though that is what you will continually be bombarded with.
I think those that find this blog worthwhile will also enjoy the interview so I hope you read the full interview.
One thing for investors consulting historical data to remember is we may have had fundamental changes in stock valuations over the decades (and I suspect they have). Just to over simplify the idea if lets say the market valued the average stock at a PE of 11 and everyone found stocks a wonderful investment. And so more and more people buy stocks and with everyone finding stocks wonderful they keep buying and after awhile the market is valuing the average stock at a PE of 14.
Within the market there is tons of variation those things of course are not nearly that simple, but the idea I think holds. Well if you look back at historical data the returns will include the adjustment of going from a PE of 11 to a PE of 14. Now maybe the new few decades would adjust from PE of 14 to PE of 17 but maybe not. At some point that fundamental re-adjustment will stop.
And therefore future returns would be expected to be lower than historically due to this one factor. Now maybe other factors will increase returns to compensate but if not the historical returns may well provide an overly optimistic view.
And if there is a short term bubble that lets say pushes the PR to 16 while the “fair” long term value is 14, then there will be a negative impact on the returns going forward bringing the PE from 16 to 14. That isn’t necessarily a drop (though it could be) in stock prices, it could just be very slow increases as earning growth slowly pushes PE back to 14.
Monument to the People’s Heroes with the Shanghai skyline in the background. See more photos by John Hunter
Another thing to consider is another long term macro-economic factor may also be giving long term historical returns an extra boost. The type of economic growth from the end of World War I to 1973 (just to pick a specific time, there was a big economic slowdown after OPEC drastically increased the price of oil). While that period includes the great depression and World War II, which massively distorts figures, from the end of WW I through the 1960s Europe and the USA went through an amazing amount of economic growth.
