I am a Monkey

I didn’t intend to write about this today. I had a great post in my head about retirement that I think many of you would have enjoyed. I also had one about the value of a dollar that I think will make you think. Perhaps I’ll write these next week, but today I’ve got a confession to make. I am a monkey.

You might wonder how a monkey has run this website for the past year. Well, I can prove that I’m a monkey with these three reasons
1) I am very hairy
2) Monkeys and I have about 97% of the same genetic code
3) Miserly Bastard indirectly says that I’m a monkey: “Lesson #1: Prosper lenders are monkeys.”
I’m going to ignore the first 2 points and focus on the third point of his.

In case you were too lazy to click the link (I know I would be), here’s the brief summary of Miserly Bastard’s take (in my words). A person on Prosper tried to take out a loan of 25K at 13% to invest in the stock market. It appears as if he has no serious investment experience. He got 85% of the way there with lenders willing to give him 20K. Thus if he had only asked for 20K he would have had the loan funded.

I hope that most of my readers right now are cringing at the idea. By many accounts, the market returns 8-12%, and in this case the person asked for a loan at 13% in HOPES of beating the averages in a game he doesn’t seem to know a lot about. If you think this is a good idea in general, I’ll have to shake my monkey tail at you.

Before we open and shut the case on me (and other Prosper lenders) being a monkey, let give some reasons why this might have happened.

1) It’s important to note that his credit grade is AA – meaning he is the best possible candidate to give a loan to. He also has no delinquencies and no debt – a completely “clean” credit profile. In fact, Experian data suggests that people with this grade default only 0.2% of the time. That’s 2 people in 1000. Prosper’s historic rates are even lower, 0.13% of the time from this data. Perhaps the monkeys thought, “I have a 100% chance at earning 5% in a high-interest savings account… or I could have a 99.80-99.87% chance of earning 13%.” I have to say that I’m with the monkeys on this logic.

2) Even if he lost money on his investments, his history shows he’ll pay his debt from the surplus in his monthly budget which he states is $1500. Thus the monkeys don’t 100% REQUIRE his plan be successful, they just need to be confident that he’ll repay. Note this from the questions, “Even if the worst case scenario happens and my stocks go down in value, I will still have more than enough money to repay this loan.”

3) Looking at the questions he anticipated the lenders being willing to bid the loan down. He did some homework, “the Vanguard S&P 500 fund, has returned 12.36% since inception.” Thus his thought was never to take a 13% loan to try to beat the market. He went as far to withdraw the loan so that he can relist it and give him more margin for error. Let’s say he relists it at 10%, perhaps the monkeys are no longer willing to lend it to him.

4) Even if you agree that this is hare-brained for the borrower and the lender monkeys (and I’m not entirely sure about that), it’s worth noting that this is one loan. Miserly Bastard has taken this example as representative of the whole. One could just as easily take Enron, Worldcom, Webvan, or Pets.com and conclude that the stock market is an even worse place to put your money. With this loan many people could be out $50 or so (collectively a potential 20-25K), but with those previous companies people lost millions (collectively billions). So if you are going to throw out Prosper as a bad idea, you best getting out of the stock market.

5) Building on #4 above, one must remember that putting all your eggs in one basket that you can’t control is very bad. Just like you wouldn’t have put all your money in Worldcom, you wouldn’t have put all your money into one Prosper.com loan. It is much better to look at it as part of a whole. If you invested in a S&P 500 from 1998-2000, there’s a very good chance it had invested in Worldcom (I’m 99% they were included in this index). I don’t think you are a monkey for putting money in a index fund. However, when some small percentage of people invest in something a little out of the norm, you become a monkey. It’s worth noting that this loan hasn’t failed like Worldcom yet – I would argue he may break even on his plan with the lenders getting the profits.

Here are some points to take away from this…

• Lending on Prosper is like a creating a mutual fund of loans. You have control in what you pick. If you think this above is hare-brained, you don’t invest and you move on. You don’t have to take every loan, you cherry pick the best ones. In the long run, you are going to have some good loans and some bad loans. You can, to some degree, control the quality of your loans which will greatly impact your bottom line.
• Borrowing on Prosper – I mentioned this recently, but there are some circumstances where you can’t lose as a borrower. One great way is to lower credit card debt as Tricia from Blogging Away Debt found out.
• It’s very dangerous to take one example and generalize it for the whole group or sector. It’s wise to at least have a majority of datapoints before making a conclusion.