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Eight Lessons For P2P Lenders From Warren Buffett
Freelancer Cliff expresses his own unique views, ensuring you get different opinions to the more typical 4thWay experts and 4thWay researchers’ views. Read about Cliff.
As someone with an interest in peer-to-peer lending, you've probably heard of Warren Buffett, the American billionaire who is widely acknowledged as the world's greatest investor.
However, if you haven't heard of “the Sage of Omaha”, then I'd urge you learn more about Buffett. As an investor, businessman and philanthropist, Buffett is widely regarded as one of America's greatest success stories.
The wisdom of Warren Buffett
Born the son of a US congressman in 1930 during the Great Depression, Buffett grew up with a keen interest in making money while avoiding losses. Today, aged 88, he still runs holding company Berkshire Hathaway, which he grew from modest beginnings into a $500 billion behemoth (and of which he still owns about a sixth).
Despite being one of the world's richest folk (a personal fortune exceeding $80 billion places him #3 on the Forbes rich list), Buffett lives in a modest home in Omaha, Nebraska (bought in 1958 for $31,500), eschewing the world of Wall Street and its enormous egos.
What's more, through the Giving Pledge he launched in 2010 with Microsoft's Bill Gates, Buffett has promised to give away 99% of his entire wealth during his lifetime, having donated over $35 billion to charitable causes to date.
By any measure, Warren Buffett's wisdom – which is often homespun, folksy and down-to-earth – is well worth reading and taking to heart. For more, I recommend The Snowball, which is the greatest book on Buffett I've ever read.
What advice might our esteemed Oracle give to P2P investors, whether newbies, would-be or veteran lenders? Let's start with Buffett's primary rule, which is…
1. Warren Buffett's golden rule: “Rule #1 is never lose money. Rule #2 is never forget Rule #1.”
This advice – to build wealth, avoid making losses – is deceptively simple and yet also profound. While some may consider this rule trite, Buffett's underlying point is that while all investors (including him) lose money at some point, the more effort you put into researching and understanding potential investments, the more likely you are to preserve and grow your capital. Likewise, when you invest in haste, you repent at leisure.
2. “It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
What goes for company shares also applies to P2P loans and accounts. One mistake some P2P investors make is to chase the highest interest rates on offer, working on the assumption that the higher income these rates generate will produce higher overall returns. However, the higher the return, the greater the risk, so you should expect to lose money every so often when high-rate loans or accounts inevitably turn sour.
3. “You can't produce a baby in one month by getting nine women pregnant.”
All investing – including P2P lending – is a marathon, not a sprint. As an investor, you are in this for the long run and, unless you have a time machine, there are no short cuts to the finish line. The best things, like fine wines and cheeses, take a long time to mature and, similarly, the best investors pace themselves and never cut corners.
4. “You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.”
History is littered with highly intelligent failures and, beyond a certain limit, education, intellect and even genius are not useful assets for investors. In my view, two traits are much more important. First, almost nothing is as valuable as persistence: having the discipline and determination to invest through good times and bad. Second, having the self-control to avoid ‘animal spirits', especially fear and greed (which contribute to, and partly cause, market booms and busts).
Therefore, don't worry too much about your intellect when investing in P2P products. Instead, focus on your long-term goals and attitude to risk and resist the primal urges that frequently derail investors.
5. “[With] high fees, it will usually be the managers who reap outsized profits, not the clients.”
Before investing in any and all P2P products, check very carefully how much your “helpers” – the P2P lending sites – will skim off your returns in fees and charges. The higher the fees, the lower your net returns, so keep your eyes open for hidden or excessive charges. 4thWay will help you interpret when charges seem too high for a given lending account.
6. “In investment management, the progression is from the innovators to the imitators to the swarming incompetents.”
The world's first P2P-lending platform, Zopa, launched in the UK in March 2005, just 13½ years ago. Over the next few years, other established platforms followed suit, including heavyweights RateSetter and FundingCircle.
With much of the innovation now established practice, UK P2P lending has grown to encompass many ‘me too' imitators and a fair number of incompetents, including collapsed sites Lendy and TrustBuddy. Accordingly, be ultra-careful when lending through new P2P lending sites, because there are no prizes for being the first into the next failed one.
7. “The one thing I will tell you is the worst investment you can have is cash.”
Buffett adds, “Everybody is talking about cash being king and all that sort of thing. Cash is going to become worth less over time. But good [investments] are going to become worth more over time.”
Despite this caution against cash, Buffett's Berkshire Hathaway has a cash pile of $122 billion. Then again, if he and his long-time investing partner Charlie Munger find another great business or investment to buy at a fair price, this cash will soon be put to better use.
On the other hand, when you give up the safety and security of keeping your spare cash in the bank, you should seek out decent returns to make up for the extra risk of P2P investing. Likewise, when interest rates are soaring, cash really is king, because you can get more for less.
8. “It is not necessary to do extraordinary things to get extraordinary results.”
Few investors understand the simple truth that, most of the time, investing is boring. It's during times of fear, panic and greed that it becomes interesting – or even terrifying. Actually, getting rich is a simple formula: invest some of your income into diversified, long-term assets, sit back for decades, and watch Mr Market do the hard work for you.
You don't need to take extreme risks to get rich. There are no sure-fire ways to get rich quick.
If an investment sounds too good to be true, it almost always is. And as Buffett famously remarked, “Be fearful when others are greedy and greedy only when others are fearful.” One more Buffettism to finish: “Speculation is most dangerous when it looks easiest.”
To sum up, in the P2P world, don't pile into any loan, account or P2P lending site without asking and then answering all the questions you need before you invest your hard-earned cash. Also, if you can't afford to lose much money, then make damn sure that it's well-diversified and not over-exposed to any single P2P lending account, website, market or industry!
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For 4thWay’s most sage words and sayings, see 4thWay’s 10 P2P Investing Principles.
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