Tuesday, March 07, 2006

My long term Prosper relationship prospects

I suspect that over time, while I'll still invest a fairly decent amount on Prosper.com, the market will become increasingly efficient. at some point, this probably means that I'll want to start switching back to other investments, whether through attrition or active shifts (assuming loan sales take off as well). Also, efficiency levels are likely to swing back and forth from day to day, at least until prosper gets really large, so my point of reduction of risk may be a ways off.

Over the very long term, I don't know if the edge from disintermediating big corporate lenders will outweigh the disadvantages (eg, I don't have complex models, true scalability, the best deals w/collection companies, etc) by a great deal. As long as there still is some edge, even if small, I would see a baseline level of investment that stabilizes over time.

In favor of prosper, one might argue that even setting those factors aside, most of my substitute investments w/similar risk factors and returns are
a)equity-based, like various credit card companies
b)one of the closest substitutes, asset-backed securities (ABS's) composed of packages of consumer loans, will still be institutionally oriented, and too large in denomination for the average retail investor.
c)even if one were rich enough to buy ABS's in reasonable size (and ignoring the investment banking fees of such security issuance), they still won't have as potentially high return/high risk ratios as loans to HR/E/NC borrowers, as most big lenders don't want the volatility of sub-sub-prime lending on their balance sheet, or off it in ABS's that they sponsor.

The academic's reponse to c), might be "you can just borrow money at margin rates to invest in ABS' and get the same effective investment returns/risks by levering up, is probably empirically untrue.

I think that in the very long term, assuming that I don't become immensely wealthy, I'd probably have a core investment in standing orders, and some small opportunistic pool of money, for people who happen to post exceptionally appealing, insta-funding loans. I'm not sure if I'd implement my opportunistic pool through standing orders (assuming refinement of the standing order option set over time) as well, or if I'd look through loans manually.

Again, I suspect manually, because
a)I _enjoy_ lending on prosper to a certain degree, for the same reason that some people like gambling on horse races or daytrading penny stocks.
b)If I have a large core pool of assets that diversify my holdings, I can afford to diversify less in my opportunistic pool (very roughly speaking).
In practice, this means that if i find 2 or 3 really appealing loans, I can afford to to fund them completely rather than dole out a few dollars here and there to each as I have to now. Thus, the effective research cost of opportunistic investing as a % of loan value is a lot lower.


At 1:43 PM, Anonymous Anonymous said...

Assuming that the spin is correct and ZOPA launches in the US. Would you be more or less likely to play in the ZOPA marketplace?

At 2:19 PM, Blogger cellardoor said...

Zopa seems set on launching -- but they also seem to be unwilling to break out of the diversified AA/A/B borrower paradigm. As such, I'd rather stick w/Prosper -- especially given that much of my non-risk/return based utility is derived from the researching/interacting/bidding experience itself -- which is fairly diluted if you're looking at pools of 50 loans (again, Zopa's old model).

At 10:00 PM, Blogger Lazy Man and Money said...

I have to agree with you, the market is going to be increasing efficient. Even close to three months later, the market is still efficient. At some point the Ebay factor will take over - everyone will know about it - and it will be more difficult for both buyers and sellers to make money from the system.


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