Lending Club Review – The 21st Century ‘Virtual Pet’

Recently I had the unpleasant experience of watching a Cable Business News Show Anchor interview of a self-proclaimed investment ‘advisor’, touting his vast experience with Lending Club.

I won’t name the channel or the show, but the Business Anchors on this particular channel have been confused with “adult film stars” on a once-famous online quiz.
Back to my news-watching experience.  The TV dude claiming to be a ‘seasoned’ investor on Lending Club had- Get This- 10 months of experience, with over 100 Loans!  

You’ve got to be kidding me.  100 loans can be as little as $2500 invested- Not exactly a lot of skin in the game.  And for anyone who has ‘real’ experience with Lending Club, you know- Either from personal experience or from making the effort to read Lending Club’s own Blog- That delinquencies don’t typically hit you until some time after the 12-month point.

So here’s my summary of Lending Club, more than 2 years and more than 800 loans in.

Assessment: Returns.  My ‘real’ rate of return with LC is just north of 8.7 percent, investing mostly in C/D/E Grade loans.  Based on experience, my quick assessment of a loan’s expected ‘real’ return is that you take the face rate of the loan, “Whack it in Half“, and that is your real expected IRR.  I use the XIRR function on MSExcel/OpenOfficeCalc to check my overall IRR each month.  If you have no clue what IRR means, how to calculate IRR, or how to use a spreadsheet’s XIRR function- you have no business investing with a product like Lending Club.  Go pick a short-duration bond fund or CD for your short/intermediate term investments.

Assessment: Opportunity Cost (Time).  Lending Club started strong but has become the 21st century ‘Virtual Pet’.  If you’re too old (or too young) to remember Virtual Pets, back in the days leading up to Y2K there was a Japanese Fad which briefly spilled over to the States.  Virtual Pet fad participants kept this little puck- that looks like a Casio watch without straps- in their pocket.  The LCD screen has a dog or cat on the display.  Every few hours the Virtual Pet chirps at the owner, encouraging the owner to ‘feed’ or ‘walk’ or ‘pet’ the Virtual Pet by pressing a button.  The Virtual Pet then rewards the owner by doing a little wag of its tail on the LCD screen or squeaking a thank-you chirp back at its owner (Author’s Note: The Virtual Pet fad is now replaced by full-color smartphones, which squeak at their Owners at random intervals.  The Owner pulls the smartphone out of her pocket, rubs and taps the screen a few times, then forms a joyful smile as she is rewarded by a few pleasing smartphone squeaks).  I digress…

Flash forward to 2013.

Unfortunately, unlike most other income-generating investments, LC is not a ‘fire and forget’ investment.  Due to frequent turnover (repayment of loan principal), you have about 5-10% porfolio turnover every month which goes to zero-interest-bearing cash.  This means you must go back in to LC, pick new loans to invest in, and re-deploy your cash.   This was not a big deal during the first few years of LC, but at some time during the past year loan picking became super-competitive.  Loan funding periods shrunk from the originally-intended 13-day review window to being funded by investors within minutes.

Demand for new LC notes has become so under-served that you have to log on promptly at the daily note issue times-  6AM, 10AM, 2PM, or 6PM PST.

I’m not sure if this is due to VC/Hedge/Institutional Funds investing in LC, or if LC became a victim of its own success, but the result is the result- Instead of individuals being able to log-in to LC once per week to re-deploy their investment pool, individuals like me (who have real jobs and are busy during the work week) have to set Outlook Calendar Reminders to avoid missing out on new loan issues.

When I see my LC idle cash exceeds my ‘Idle Cash Pain Threshold’, I set an appointment on Outlook to chirp at me at 10AM or 2PM.

Then it hit me like a Ton of Bricks- Lending Club has become the 21st Century Virtual Pet:     

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