Joe Saul-Sehy
SB311 Will Negative Interest Rates Solve Our Problems?
Bud turns to flower….do negative interest rates turn into better economies? Do students who play sports turn into better investors? Do people who invest in peer-to-peer lending sites have better returns than others? We’ll answer ALL of those questions (or at least discuss them) on today’s show!
ALSO – Our fun fintech product of the week….CrowdInvest. This is quite an idea: swipe left or right based on your thoughts about a stock. CrowdInvest takes your thoughts, combines them with others, and last year beat the S&P 500 with the results! We talk to Martin Mickus, the founder of CrowdInvest about how it all works.
Thanks to MagnifyMoney and SoFi for sponsoring our podcast!
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Show Notes:
<> Open
From student loans to personal loans and mortgages, lower your interest rate with a strategy involving SoFi. You need a good credit score to qualify.
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<>Our Topics
- Student Athletes More Likely To Thrive After College (Time)
- If Zero Interest Rates Fixed What Was Broken, We’d Be In Paradise (ZeroHedge)
- Why Income Investors Should Consider Peer-To-Peer Lending (Marketwatch)
<>Today’s Roundtable Contributors
Greg McFarlane
Investopedia.com (Read: How Novartis Makes Money)
Barbara Friedberg
BarbaraFriedbergPersonalFinance.com
Barb’s new site: RoboAdvisorPros.com (comprehensive reviews of roboadvisors)
Katie Brewer
<> FinTech Product – CrowdInvest
Check out the app: CrowdInvest
Follow TipYourself on Twitter: @CrowdInvest
Regarding P2P I have some questions to the roundtable:
1) Why is P2P lending risky? Consumer lending is not a new thing, so it is wrong to say that p2p is ‘too young’. The model “from person to person” is new, but not that different from “banks collect savings with 1% rate to lend the money out with 18%”. We just eliminate the middle man from the equation. How come did the risk rose that much? I think it is more riskier to have banks “too big to fail” than thousands or millions of investors that adequately diversify.
http://www.lendingmemo.com/p2p-lending-recession-performance/
2) Why P2P lending is difficult (due to the need for diversification)? Banks have hundreds or thousands of loans in their portfolio. With $25 you can invest also to hundreds of loans. Actually on average you need 146 notes to have consistent positive returns (http://blog.lendingrobot.com/research/146-the-magic-number-for-lending-club-investments/)
How many stocks you must have to have consistent positive returns?
3) How P2P is in a bubble? Just because it is growing really fast? Okay, I understand. If mom gives you 1 dollar per week pocket money and then suddenly starts to give you 2 dollars, thats whopping 100% growth. But if you get 1000 dollars every week and now mom adds some 50 bucks to it, it’s only 5%. Go figure then..
Or did they mean that so many new platforms pop up every day? How many of them allow Average Joe to invest his 25 bucks? I think I have more fingers than such platforms in the States at the moment.
4) Prosper was founded in 2006 (agreed Prosper 1.0 was bad, but they are not the market leaders either), Lending Club in 2007. Yes, both of them were in quiet time in 2008, but I think it is misleading to say that they haven’t been in a crisis. Zopa (UK) started in 2005. Again, go figure when did the last crisis hit us.. pre 2005?
I was really dissapointed this time.
Here’s something funny, I’m not disappointed at all. I think you need to temper your clear enthusiasm with P2P (apparent in your “disappointing” statement) with their point of view. Do you think we have people with no expertise on our show? They disagree with you, and I’d take it seriously.
As a guy who spent 16 years in the industry and another six years in the business of financial journalism, here’s my answers to your questions:
1) While I agree that P2P is a great innovation, at it’s heart, you’re still loaning money to your cousin Billy who you wouldn’t loan money to if he asked. You just don’t know this guy asking for money.
2) I don’t think it’s difficult. If they gave you that impression, I personally don’t agree. However, it IS more difficult than throwing money in the S&P 500 fund.
3) They said P2P may be in a bubble (no call on a REAL bubble) because it’s the “hot” thing right now. If the economy goes into a recession, lots of people will fail to pay their bills. History has shown us that this hits the entire economy hard. It isn’t just a few companies that go “bye-bye.” Lots of people struggle during a recession and it’s hard to predict who will survive.
4) The last crisis hit in 2007/2008.
Well, the case of peer lending is that you lend money to several people “(diversify) and yes, while there might be also cousin Billy who gets your money, then the platform will send the cousin to bailiff if he is not able to repay. The main difference stands in 3 points:
1) Statistically there will not be 100% cousin Billys, ratio is rather 1/10.
2) You would lend to cousin Billy 25 bucks, not 5000.
3) Lending is official, meaning you don’t have to worry if he doesn’t pay. If you personally hand out the money to Billy, it’s your problem. If he borrow money from you with the help of Lending Club or Prosper, it’s his problem now.
Ok, agreed! It might be more difficult than adding money to the S&P 500 fund because you have to do one more step: set up autobidder. But it’s not harder than evaluating and executing a deal on some particular stock.
Like you said, last crisis hit in 2007/2008. There is data proving that credit card business was profitable even in 2008 and 2009 (credit card business is not that far from consumer lending business). Delinquency rates rose even 100-500%, yes. But as I said: 1 to 2 dollars is 100%, but 1000 to 1050 is just 5%. Meanwhile stocks plummeted really bad scaring a lot of people away from the market.
And to answer to your question: “Do you think we have people with no expertise on our show?”
No, I don’t. They are experts, but not necessarily in peer lending. It was surprising to hear that because of some mysterious cousin Billy it is OK to say that peer lending in broader sense is risky. For me it was like putting Apple and Valeant Pharma into the same sentence and declaring investing into stocks is risky.