Jul 132017
 

Lending Loop Update

Earlier this year I blogged about investing $20,000 in a peer-to-peer lending platform called Lending Loop. My goal was to make 8% return overall, net of fees and write-offs. To be frank I was a little apprehensive at first when I learned about the high interest rates.

I wondered if it was really possible to earn 15% or higher rates of return consistently. Being greedy, I decided to give Lending Loop a try. I primarily invested in B and C loans because they are relatively safer, although the returns are lower than loans in higher risk categories.

Here’s what my Lending Loop portfolio looks like after half a year of investing. This screenshot was taken at the end of June.

As we can see I have made about $846 so far. Yay! ūüôā That’s about 4.2% return, or 8.5% annualized return. This is very much in line with my expected 8% return I had initially set as my goal. I have invested in roughly 30 different loans so far on the platform, each loan averaging $700 of principal. Thankfully none of them have missed a payment yet so I’m really pleased about that. ūüėÄ

If this trend continues I should be able to earn a double digit return by the end of the year! But this rosy picture assumes there are no defaults on my loans for the next 6 months. ūüôā Anyway, I will update again at the end of the year so we shall see what happens.

Unlike investments in a tax advantaged account, my Lending Loop returns will be taxed at my marginal tax rate, which is about 30%. This means if I earn 8.5% from the P2P investment, I will only end up making roughly 6% return after tax. To me 6% after tax is pretty good and certainly beats many alternative options out there. ūüôā As interest rates are starting to climb slowly in North America, fixed income investments such as Lending Loop should continue to be attractive for investors looking for yield.

 

__________________________________
Random Useless Fact:

Due to the lower surface gravity of Mars, if you weigh 100 pounds on Earth, you would weigh only 38 pounds on Mars.

Apr 242017
 

Today we’ll explore¬†a common¬†question I get asked all the time: What is my thought process¬†behind leverage?

The short answer is simple. I want to make high returns without being exposed to high risk. Normally the two go hand-in-hand. But leverage allows me to separate them.

For example, a speculative marijuana stock may grow 20% to 50% a year. But it could just as easily lose half its value. The potential reward is tempting. But the high risk is not worth it.

Instead, I’m looking for a lower return, lower risk investment such as an established pipeline company known for its predictable earnings, dividend growth, large economic moat, and low stock volatility. Using historical data and fundamental analysis I¬†may determine¬†that there is a very high probability this stock will appreciate 4% to 10% a year. I can then apply a leverage multiplier¬†of 5 times on this investment which means my actual expected rate of return is 20% to 50%.

In other words, I do not subject myself to the high risk that is typically associated with juicy returns. But I still get those juicy returns! Awww yeah. ūüėÄ

That’s pretty much it. The long answer requires some further explanation. Let’s start with the¬†3 criteria I look for before I borrow to invest.

 

The 3 fundamental rules of practicing leverage

  1. A 10+ year investment time horizon.
  2. An adequate diversification strategy.
  3. An asymmetric risk-return opportunity.

The first and second rules are straightforward. Billionaire Jeff Bezos recommends we think in 7 year terms to remain competitive. I suggest taking that up to 10 years just to be safe. ūüôā In terms of diversification¬†it can mean more than just having stocks and bonds.

 

Seek Out Asymmetric Returns

Now comes the fun part. Rule number 3. As we all know there is no investment without risk. The third rule is about knowing which investment has a favorable¬†risk to reward ratio. This simply means comparing the odds. For example, let’s say we are asked to roll¬†a normal 6 sided die. If it lands on 1, 2, 3, or 4, we win¬†$10. ūüôā But if it lands on 5 or 6, we lose¬†$10.

So should we play? The answer is¬†a resounding yes every time! ūüėÄ We have a¬†66.7% chance (4/6) of success. So from a rational perspective this has an asymmetric probability in favor of us winning.

 

Analyzing Probable Returns with a Bell Curve

We can use a normal distribution to help identify favorable investment opportunities. In statistics, a normal (bell curve) distribution outlines all the possibilities with the most likely outcome being in the middle.¬†The standard deviation can be used to measure the variation in a set of data. Let’s see how we can put this bell curve to use when we overlay it on top of a chart that shows how many times the stock market returned a specific amount¬†over any¬†10 year period between 1916 to 2016. (source)

So over the last century, any 10 year period of investing in the S&P500 index would have returned somewhere between 6% to 11%, 40% of the time, or within 1 standard deviation of a normal distribution curve. Additionally, returns were between 3% to 14%, 72% of the time, within 2 standard deviations from the mean.

This¬†strongly suggests that we have a 95%¬†chance (95/100 possibilities) of making at least 3% annual return from the stock market in any given 10 year period. Pretty neat eh? ūüėÄ Time in the market reduces risk in the market, and creates a huge asymmetric advantage to investors!

But enough theory. Let’s see this at work¬†in a real life example.

 

Banking on Leverage

A couple of years ago I used leverage to buy RBC¬†Royal Bank stocks. Let’s go through my thought process behind this decision.

Large cap, blue-chip dividend stocks are ideal to use leverage on. They don’t come much bluer and larger cap than RBC. It’s the largest company¬†in the country. Plus, there’s a lion in¬†the logo. That’s how you know it’s a top quality company. ūüėČ

I borrowed $4,000 to buy 55¬†shares of TSE:RY and contributed¬†$0 of my own money. I wrote a full analysis on RBC and explained¬†why I thought it¬†was a good stock to buy¬†at the time. The reason I used leverage was because I didn’t have any cash and the investment fits my 3 rules of leverage.

  • First rule: I planned to keep RY stock¬†for the next 10 years.
  • Second rule: I made sure RY would only be a small part of my total portfolio.
  • Third rule: RY’s P/E ratio, peg ratio, and other fundamental measurements looked appealing in 2015. The stock¬†was expected to¬†grow 8% to 10% a year for the foreseeable future. Historical data showed strong earnings growth and stock appreciation. RY’s¬†dividend would be enough to cover the interest cost of the debt. Thus, this would have a favorable¬†asymmetric risk-to-reward ratio.

My return on this investment so far, net of margin interest cost, is about 37% or $1,500. Not too shabby. ūüėÄ But this shouldn’t be a big surprise. After all, stocks are fundamentally priced based on their earnings. And RBC has an impressive¬†history of consistent earnings growth. Back in 2015, RY was expected to earn $7.35 per share by 2017. Fast forward to today, it appears RY may actually be on track to hit $7.40 EPS this year. We shall see.

This leveraging strategy is also¬†recession resistant. For example, let’s say I did the exact same thing in 2007 at the peak of RY’s market capitalization, (the worst possible time to use leverage) right before the greatest recession of our generation. Yikes! Well despite the unfortunate timing, 10 years later I would still end up with a 70% positive return, net of interest expenses! This is why I am not concerned about future recessions. ūüėČ I know I can just hang on to RY until the stock market recovers like it always does after a major correction.

Continue reading »

Nov 142016
 

If our employer gives us the option to collect our paychecks one month in advance, but charge a one time fee of 1% then I’m sure a lot of people would like the idea. Maybe we¬†won’t use it, but it’s nice to know we¬†have that option to get paid a month early if we¬†want to! ūüôā This is similar to when a bank, car dealership, or credit card company offers us a loan that has a¬†12% annual interest rate.

Both examples are essentially the same thing. We receive some money in advance, accrue a small fee, and eventually pay back the full amount with either labour or cash savings. Workers are¬†willing to pay that extra 1% fee if it means giving them the freedom to choose when to spend their money. Maybe they really want to take a family vacation now instead of next month before the busy and more expensive holiday traveling season. It’s nice to have the option to do so even if it means giving up 1% of their income because of tradeoffs. Some people are even willing to accrue a 5% charge. In that case, they can take a vacation 5 months in advance. When most people think about debt, they focus on the borrowing cost or interest charges. But when they think about getting an early paycheque, they focus on the financial benefits of the premature income. But both situations can be thought of as balancing time and money. ūüôā

I think if people start to look at debt as a financial tool rather than a burden, they will see that borrowing money is a natural part of life and we shouldn’t be afraid of it or patronize debtors.

__________________________________
Random Useless Fact:

Sometimes the best response to provocation is not to engage.

16-11-dog-cliff-bird

Oct 202016
 

Debt Isn’t Bad

Private debt was invented to facilitate convenience in trade. This principle was widely accepted¬†for most of human history. But things have changed in the 21st century. Today, many generic debt bloggers will rant about how much they hate debt with a passion¬†and want to pay off their debts ASAP. They seem to be very¬†debt-icated to their cause. ūüėõ¬†But why would they¬†go into debt on purpose, and then become so upset¬†about being in debt?¬†ūüė†¬†Isn’t that exactly what they wanted?

16-09-grinds-gear-debt-loan-meme

We don’t¬†borrow money and pay interest to a bank out of the kindness of our hearts. Instead, I believe most of us go into debt for one simple reason; to increase our own standards of living.¬†We take on¬†debt because we are motivated by¬†self interest. ūüôā

Would we go into $500 of debt to buy a football? Probably not, unless it’s one that’s autographed by¬†Lionel Messi. ūüėČ But how about taking on $500 of debt to experience¬†a 3¬†week, all-inclusive trip to the Great Barrier Reef? Heck yes, I sure would!

If our objective or desire is worth more to us than the cost of borrowing then using debt is preferable.

If it’s not worth the debt then we don’t borrow. The same can be said for practicing mindful spending. It’s really quite simple. ūüėÄ

Nobody can force consumers¬†to use debt. It’s possible to go¬†through life without using¬†debt at all. But relying on savings alone to make every purchase means losing out on choices, and opportunities. By the time a saver accumulates¬†enough cash to start college, all his friends who used student loan debt to get ahead would already be graduating. Why would anyone want to commit to a debt free life if it means¬†depriving themselves of opportunities? This is why I concluded that I will probably never be debt free.

Of course it’s completely possible to have too much debt, just like it’s possible to overwork ourselves. But we should all learn from our mistakes and move on. Much like being¬†mindful of our purchases,¬†we should be mindful of where we should be on the debt spectrum.

Continue reading »

Sep 192016
 

The Effects of Debt on Your Health

According to a¬†Globe and Mail article I recently read, people have¬†gotten sick and depressed thinking about their debts. “Researchers and health professionals are making the case for treating personal debt as a public health problem.” Oh no. ūüôĀ Dr. Donna Ferguson, a psychologist in Toronto says,¬†‚ÄúI think that it‚Äôs a major crisis. It‚Äôs an issue that needs to be addressed.‚ÄĚ

The average¬†consumer debt in Canada is only about $21,000. Personally I don’t think that’s a whole lot.¬†Yet psychologists are calling this a “major crisis.”¬†ūüė†¬†People are blaming debt for making them feel physically ill. But I have much more debt than they ever will. So if having a healthy relationship with debt is their primary goal, then they should do something to keep their stress under control. ūüôā

Luckily¬†I have a solution to help those¬†consumers. If we want them to get better we have to address the root of the issue. The¬†problem is with individual psychology, not with debt. Instead of creating more health problems for borrowers and increase the burden on our public healthcare system, like what Dr. Ferguson suggests, let’s try to educate people about the¬†truth so we can prevent people from feeling ill in the first place.

So here’s my simple yet effective tip¬†to help anyone who may have debt anxiety:

If you don’t think you can handle the debt, then don’t borrow the money. ūüėÄ

Sometimes the negative consequences of debt are blown out of proportion. The ASA, a financial support organization, has even made a horror video to show the trepidation and paranoia that comes with having student loan debt, which further supports the common narrative.

16-09-allow-debt-ruin-lives-meme

Some people have this irrational fear that if we have debt then somehow it will come to get us like the boogeyman. ūüėܬ†But the reality is nothing bad will happen¬†as long as we make the payments on¬†our debt.

Missing a Debt Payment is No Big Deal

The consequences for delinquent debt are very lenient towards borrowers. The bank can’t¬†just take our house away as soon as we stop making mortgage payments. In my neck of the woods for example, the bank has to first draft up a foreclosure petition if a mortgage payment is 3 months late. Then the court hearing will be a month later. And then the property goes into a redemption period for up to 6 more months. So we have plenty of time throughout this entire process to get our payments back on track. We can even sell our house if it’s worth more than the mortgage balance.

For other types of debt, if money becomes tight we can enter into consumer proposal or apply¬†for other debt relief options. We’re usually given at least 3 months to catch up on our payments before it goes to a collections agency. Despite the scary rumors, consumer debt cannot physically harm us.¬†We won’t be assaulted¬†or locked up¬†if we’re late on our credit card payments. Nobody will drag us to jail because we failed to make a car payment, lol. The worst they can do to us is take the car away and tarnish our credit score. But I think that’s only fair. Our vehicle is being repossessed only because we broke the debtor/creditor agreement first.

So there’s no reason to get all worried and stressed out over a reasonable amount of debt. ūüôā We just have to be smart and not borrow too much.

__________________________________
Random Useless Fact:

If the original Power Rangers series were made today in 2016, it would probably offend too many people and be banned from airing in most countries.

16-09-power-rangers-pose-faces

The yellow ranger was Asian. The red ranger was Native American. The pink ranger was portrayed as a ditsy white girl. The black ranger was black. And in later episodes they introduced the white power ranger who was the strongest.