“Prosper beats the S&P 500” – That’s the subject heading from an e-mail that appeared in my in box last night. If that surprises you it probably should. It surprised me and I support the company more than most people. However, there’s a graph and everything so it must be true, right?
I looked a little more into where the graph numbers come from. For some reason they decided to compare the average return of the S&P 500 over the last two years (from 8/16/05 to 8/16/07). It’s worth noting that the S&P was at a 3-month low on 8/16/2007. They compare that against the returns of Prosper for one year. Why one year of Prosper vs. two years of S&P? I don’t know. They could have just done one year of each, but my guess is that didn’t look so well for Prosper.
So where does the 9.20% they advertise come from? One might naturally assume that all loans do. However, Prosper chose only a small subset of loans they offer – specifically the loans that beat the S&P 500 are those “originated between 7/22/06 and 7/22/07 to borrowers with AA credit grades who have 0 delinquencies and 0 to 2 credit inquiries on the their credit record, as of 8/23/07.” They provide a handy link to the Prosper performance data over the last year. Looking at it, it seems like AA, A, and B loans all perform as advertised, but C, D, and especially E are far below the S&P 500. Grade E loans lose 8% on average.
While it seems that Prosper is doing a bit of cherry-picking here, perhaps we shouldn’t fault them for it. After all, each lender can cherry-pick the people they lend money to on Prosper. If the average AA, A, or B loan earns over 9%, then if you can pick better than average loans you can do better. This is why I recommend that you review my keys to Prosper to Success. With no time investment at all, you can be getting several points above that average.
So while I think Prosper’s marketing tactics can be a little deceptive, I think it has a place in one’s portfolio. With people getting scared out of the US markets, a Prosper portfolio seems like a good hedge.