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TORCH: Investors
20/12/2019
TORCH: Investors
The Seven Deadly Sins of P2P investors - and how we can rise above them

With project TORCH, I had set out to prevent the collapse of another P2P platform – or reduce losses for investors in the event of such collapse. Loan platforms have an obvious role to play in this effort, but what about investors? I believe we must also take responsibility; after all, it’s our money on the line.

Sadly, we investors don’t always act in our own best interest. We have tendencies that can drive us to act stupidly and endanger our money (and sometimes other people’s money). Some of us are more susceptible than others, but all of us experience at least some of those temptations, myself included.

As usual, my goal in this post is not to pass judgement, but to offer proactive solutions – in this case, for overcoming our own “sinful tendencies”.

1. Living in Denial

Investing always involves risk. Always. If you invest long enough, it’s almost inevitable that you will lose some money. Repeat this sentence; print it and glue it to your computer monitor if needed. Don’t delude yourself into thinking otherwise, and don’t be swayed by promotional slogans about “safe investments”.

When offered protection against risk, remember that it has limits, and often comes with a price:

• Buying back default loans puts a heavy burden on loan originators. To maintain profitability they have to charge high interest rates, which means focusing on risky borrowers. If the ratio of defaults rises, the need to compensate investors will drive originators to bankruptcy sooner.

• This risk is exacerbated by interest on late/default payments. When the buyback guarantee is triggered, the originator needs to pay us more out of its own pocket.

• When a loan originator offers a group guarantee, it puts well-performing subsidiaries at risk from the badly-performing ones.

• Provision funds can run out of money.

• The option to sell back loans to the platform (like on Envestio, Lenndy or Kuetzal) puts the platform itself at risk if too many investors try to cash out at the same time.

• The secondary market won’t save you when real trouble begins, as deals are often frozen, or there are simply no buyers. Yes, even if you use Mintos Invest & Access. No one can actually guarantee instant liquidity.

Take every promise with a grain of salt, and always look for the risk.

Don’t bury your head in the sand.
(Image by cdd20 from Pixabay)

2. Shallowness / Laziness

Bloggers are often ridiculed when they praise a platform for its pretty interface. But it’s just as shallow to judge a platform based on its ease of use, features like auto invest and a secondary market, or the time it takes to deposit and withdraw money. It’s just as lazy to select loans only by their duration and interest rate.

It’s even worse to generalise and jump to silly conclusions. When Aforti ran into trouble, some investors were quick to declare Poland the most dangerous country on Mintos. Since then four other originators have run into trouble, none of them in Poland.

By the way, platform employees should be judged on their skills, not their physical appearance!

Image result for i have no idea what i'm doing
Don’t be this dog (unless you can match his cuteness).

When evaluating platforms, focus on their track record, team, transparency, growth trajectory and profitability. When evaluating originators, check their ratings, financial statements and loan performance. When evaluating loans look at the borrower APR, and LTV when relevant. With business and real estate projects, read the project analysis and business plan, SWOT chart and risk rating if available.

I also recommend using outside sources, like ExploreP2P‘s lender ratings for Mintos and PeerBerry, or P2P-Banking‘s stats on platform profitability and monthly volumes.

My InfoSec associate Victor Truica has published an interesting piece on Risk-assessing P2P platforms. Many other bloggers (hopefully including myself) offer valuable platform reviews, interviews and insights.

Don’t be lazy. Don’t just activate a wide auto-invest strategy and let it run. Do your homework. If you don’t bother allocating your portfolio based on the safety level of each asset, don’t be surprised when you lose money on bad investments.

3. Greed

I am not going to chastise you for seeking high returns – we are all in it for the money. However, even in the realm of high-yield investing, greed should be kept in check. Some investors prioritise returns over everything else, and invest a disproportionate share of their money in the riskiest loans, originators or platforms.

Not only does this behaviour increase risk for those investors, it also signals to platforms that investors are only interested in the riskest products. In fact, this exact thinking drove the UK platform Lendy to offer riskier and riskier projects, increasing the overall platform default rate until the inevitable collapse.

Portfolio allocation is too wide a topic to cover here – I plan to publish a separate article just on this. But I will say that wide diversification is not a magic bullet against risk. Each investment should be assessed individually and allocated a proportionate share or your portfolio to reflects its risk.

4. Selfishness

An evil incarnation of greed, selfishness is seen in promoting one’s interests at the expense of others. I am referring to affiliate commissions, which may tempt us to cross the line between genuine information sharing, and promoting a platform out of self-interest even if we don’t see it as a good investment opportunity.

As a person burdened with a slightly overactive moral compass, I am first to admit that it’s sometimes challenging to maintain one’s integrity while trying to maximise profits. When in doubt, I rely on these two principles:

  • Provide full disclosure. When posting an affiliate link, make it clear that you’d be earning money if people use it. When people are aware that you have an interest in the matter, they can make an informed decision.
  • Ask yourself: “Would I recommend this platform to my friend, mother or brother? Would I use this exact wording, or would I mention my reservations or add warnings?” Apply the same level of integrity when writing to your online peers.

If we expect platforms to be honest with us, we must be honest amongst ourselves. It’s not just a moral imperative, it’s also a practical matter. When users only share positive opinions, it created an echo chamber and makes it easier for platforms to hide their shortcomings. You should challenge platforms by voicing your doubts and concerns – not just to them, but to the world, to create peer pressure. Don’t cover for platforms, and don’t allow them to use you as a promotional tool.

That’s my own dog, Bungee, who thinks I’m great as long as I offer food.

5. Being Drama Queens

We are all adults dealing with complex investments, yet whenever I visit investor groups on Facebook, it seems that half the discussions are making a fuss out of nothing. Server issues, deposit/withdrawal delays, auto-invest issues, a few cents missing from some loan repayment – every small thing causes investors to rush to the forums.

Worse yet, they contact platforms about these things. Just imagine if every one of the 230,000 investors on Mintos sent an angry email every time a withdrawal took more a few hours…

I love the P2P community, and understand the need to share. But we need to remember that when we post something online, or send an email, something else gets pushed down. Something that may be of higher importance, like a request for transparency, or report of a serious issue (like a defaulting project).

The correct order of business when dealing with technical or personal issues on a loan platform:

  1. Avoid aggravating the issue. If the server is slow, don’t refresh the page hysterically. If you were asked for (reasonable) KYC/AML documents – don’t argue, just provide them.
  2. Wait 24-48 hours (not counting weekends and holidays). Most issues are resolved in that timeframe.
  3. If the issue persists, contact the platform.
  4. Wait 48 hours for a response (again, excluding weekends and holidays).
  5. If there is no response, and you feel that the platform is trying to avoid your question, and that the issue has become a public concern – then post it on Facebook.

6. Panicking

We’ve talked about small issues, but what about potentially large issues? This is a difficult subject to tackle, because nothing I write will stop you from feeling stressed when your hard-earned money is at risk. On the other hand, if things get to the point where you actually have reason to panic, it may already be too late to do anything.

First, let’s distinguish between actual alarms and false alarms. Suspicion is a good instinct for investors, but when you come across a suspicious piece of info, try to investigate it before spreading rumours, hearsay, and accusations which may turn out to be false. Don’t be the boy who cried “wolf”.

Example: The KNF has recently issued a warning against a lending company whose name sounds similar to that of a loan originator on Iuvo Group. Investors were quick to share the worrying news, until someone realised that the two companies had different registration numbers. Iuvo quickly verified this and assured investors that the warning had no effect on them. The fear was understandable, but could be dispelled before it was spread by the community.

We should stay informed in order to recognise early warning signs. What constitutes a warning sign? Late loans, bad financial performance, lack of transparency, regulatory changes, legal issues, scandals, news shared on forums or social media, platform reviews, TORCH reports, interviews, a change in management or terms of service, a hacker attack… Anything that makes you feel uncomfortable.

But this doesn’t mean you should go ballistic at the first sign of trouble. Remember that not every coincidence indicates a trend, not every mistake is a scam or fraud, not every default will result in loss (that’s the point of debt collection and collateral), and and not every failure means the end of a platform or P2P at large.

To make informed and level-headed decisions, you need to assess warning signs on a case-by-case basis, and also in relation to each other.

Examples:

  • If two originators run into trouble on the same month, but for different reasons, you should probably treat them as separate occurrences.
  • On the other hand, if a platform shows multiple signs of unprofessional conduct, these signs should be viewed in unison and raise concerns about the entire platform.
  • A regulatory change will have a different effect on each originator, depending on its lending practices and the scope of its operations in other markets.
  • When you have a good understanding of the potential impact, you can make appropriate adjustments to your portfolio (into other loans, originators, platforms, or completely different assets, depending on the issue), thereby reducing exposure to danger. When your potential loss is smaller, you are less likely to panic if a crisis does come. And if every investor follows this practice, less money will flow into problematic loans, originators or platforms.

    Of course, it’s better to avoid bad investments beforehand than sell them to other investors when things go bad. But even this practice has its merits. Distributing the potential loss across the community can prevent a more severe impact on one group of investors (similar to a provision fund). Discounts also split the potential loss, and allow risk-takers to bet on bigger profits in case of recovery.

    Secondary market sales might even have a positive influence on market dynamics. Imagine if everyone sold their Aforti loans at a discount when their rating was downgraded. People who still believed in Aforti would buy these discounted loans instead of financing new loans. Others would recognise this as another warning sign and avoid Aforti altogether. Both things would make Aforti’s life more difficult, but also decrease the community’s exposure to the failing originator.

    Remember: Even if the platform offers to buy back loans, selling them all your loans at once is a last resort. A massive sell-off is almost guaranteed to create a cash-flow crisis and kill the platform.

    You are holding a nuclear switch.
    (Image by Gerd Altmann from Pixabay)

    7. Apathy

    I’ll level with you. Despite praise from the community (for which I am grateful), the TORCH project has so far achieved nothing in improving platforms. Clearly they are not very motivated to improve.

    We need to be louder and more proactive in demanding more from them: better transparency and safety, less promotional mumbo-jumbo and false promises. Let platforms know that you have more money waiting to be invested, and so do your friends, family and coworkers, who still avoid P2P due to low regulation and high risk. Remind platforms that in order to grow, they need to earn trust.


    That’s it. I hope I was able to inspire some thought, and a better approach to investing.

    It’s your money. Take responsibility for it.

    This post is not meant as investment counselling. I am just a fellow investor sharing his thoughts and personal experiences.

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