Two fingers mean I'm trying to sell an overpriced note.
I spent my Sunday searching for undervalued commodities, first in my fantasy football draft (I know – big dork), then on Lending Club‘s Note Trading Platform. The draft was hit or miss, and I’m sure I won’t know whether I hit or missed in most cases until later this season. The Note Trading Platform was pretty barren. I’d love to hear from someone who has had better luck finding something worth investing in there, because I honestly couldn’t find anything that I thought was even a mediocre investment opportunity.
Most of the people selling notes on the note trading platform are selling them for a specific reason. For the most part, that reason seems to be because the borrower is behind on their payments. Their credit score and the probability that they’ll repay has taken a plunge for whatever reason. In some cases, the borrower is just late. The investors want to sell these notes for an obvious reason – the notes are surrounded in uncertainty. There’s really no way to know whether the borrower will continue to be late, continue to miss payments, or whether they’re going to turn it around and start meeting their obligations.
Of course, not every note is late or in the grace period. Some of the notes are being paid back as promised, and as a corollary the lender’s credit profile has improved. The problem with these notes is that they’re mispriced. The investors selling them are trying to sell them for such a hefty premium that you’d think they were government insured obligations. In some cases, the notes are priced so high that even if all the payments were made as scheduled, you’d be receiving a negative interest rate. It’s hard to believe, but I guess there’s no way to understand what these people are thinking. Maybe they actually don’t want to sell the notes, but would be willing to do so if they found someone who was willing to make a really nonsensical decision. When I was a young kid, I used to collect baseball cards, and this is the type of trade I would make with my cousin who was 2 years younger than me (he rewarded me by making me his best man in his wedding, which is next week). In any trade you make, you have to ask yourself the question, what do I know that the seller doesn’t know? Do they know something that I don’t know?
In any case, I think there are some good investments on Lending Club if you invest in the original notes. Until the Note Trading Platform becomes a more rational marketplace, I wouldn’t buy anything there. If you find someone willing to buy your notes for the ridiculous markups and enormous risks associated with such a trade, well, enjoy your profits. It won’t be me. My recommendation is to avoid the trading platform. If someone else has another view or has had some success on the Trading Platform I would love to hear what it is you do and how you do it. I’ll be impatiently waiting for Lending Club’s (like Prosper‘s) approval in Missouri. Thanks for reading.
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