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How The Most Successful Individual Lenders Grow Their P2P Wealth
Over the past month or so, I've talked with a couple of dozen investors who use 4thWay's research.
It's been one of the advantages of growing a wealthy collective of lenders to get better returns while doing something useful to support the proper functioning of P2P lending platforms for all lenders.
Usually, I don't get to talk to people who are using our research. We post it on the web and send it out in emails, and that's generally that.
This first-hand contact, apart from being an enjoyable experience talking to some of you who use our research and share common interests, has given a lot of insights into how some of the wealthiest 4thWay users go about assessing P2P lending opportunities. I want to pass these on to you.
Many of these lenders are also property developers, landlords, they run their families' wealth funds, or they have worked in industries similar to P2P lending, such as private credit.
What's more, they are typically heavily invested in P2P lending, with quite a few of them going back to the beginnings of this industry with Zopa, which started in 2005.
They have successfully navigated through all the changing economic circumstances and evolving providers, earning a lot of money along the way.
Here's what I learned about how they go about their lending:
Sign up and take a long look around
Almost all of them know the phrase “due diligence”, which is an investment industry phrase that basically means doing your research before investing.
Despite their deep pockets, they don't get the access or data 4thWay does, or even have remotely as much time to spend probing and pushing each provider. Yet they still don't rush what they're doing.
Part of their due-diligence process is often to sign up to a potential P2P lending provider, reading every page they can on the website. Every day, for many days, they might read the details of the new loans that come about or of loans that become available for resale on the provider's secondary market.
They soak it all in.
Put a little money in first – but not to find out the risk of losses!
Sometimes they go as far as putting in a small amount just to see how well it all works in practice, what difficulties they have and what the experience is like.
Notice this is not the same as “dipping your toe in” to see if it's a good investment. That old hackneyed advice from investment commentators – who should know better – is a dreadful way to test whether an investment is going to give you good returns or not.
Just because one to two loans have gone well for you, it doesn't mean the rest will, or that the people assessing and approving the loans are any good at it.
The experience of trying it out first can, however, give you some potential insights into the character of the people and provider. As in how much effort they take to look after their lenders or to make it easy for you.
Making direct contact
Often, these lenders attempt to get into direct contact with the P2P lending companies.
The more money you're potentially putting on the table, the higher chance you have of talking to someone senior. 4thWay is for everyone, so I know that many of you lend smaller sums, but getting to talk to anyone at all who can answer your questions directly is useful.
Write out a list of all your questions as you're researching and call them up.
If the representative you're talking to says they'll need to look into it for you, ask if the person they need to consult is free right now, because you want to talk with them directly. If met with hesitation, you could point out that it will be quicker and use fewer people hours if you just ask the person directly, rather than relaying back-and-forth.
That person is likely to be more involved in or familiar with what's really happening when the company is assessing new borrowers. So you'll be able to better judge for yourself what you think of them.
The more details on a loan, the better
Typically, 4thWay's wealthier lenders emphasise details, details, details. The more details they get on an individual loan, the more money they are willing to put into it.
They underweight loans with fewer details and more question marks.
Curiosity saved the cat
Most of the time, these lenders are talkative and curious. They want to learn. And they put that to good use when trying to work out how a provider ticks, what its terminology means, what the people behind it are really like.
I feel a little uncomfortable blowing our own trumpet, but quite a lot of these lenders have said that they heavily use our ratings and research, as we have an exceptional record since we started in 2014.
I'm glad that they don't rely on our ratings exclusively, because it's still just one tool in your overall due diligence. And no ratings system is always going to get it right every time forever.
Nor are ratings going to cover every aspect. Our 4thWay PLUS Ratings look at the risk of losses from bad debts versus interest earned in a terrible economy and a property market crash. But they don't look at the other risks.
Spreading their money around
All of them think carefully about diversifying their money across multiple P2P lending accounts that have different kinds of loans and borrowers, as well as lending across lots of loans.
This really is the basics of money lending, but P2P lending companies report to us that a surprisingly large number of lenders just lend in one loan.
4thWay's own surveys of lenders have found that lots of people just use one or two different lending accounts.
They are conscious of idle money
To benefit from compounding – which is earning interest on top of interest to grow your wealth at an ever increasing rate – you need to keep your money working.
These lenders don't leave cash sitting around in bank accounts or P2P lending accounts. If it's not working for them, they move it.
They are prepared to say “No” after long research
They've asked providers questions, they've signed up and they've looked into loan details, they've read up on those providers, and given them a lot of thought.
A common mistake across all types of investments is that when you're committing a lot of time to investigate, you gradually start looking for more reasons to invest.
That is the reverse of what you should be doing when you're assessing investments, which is looking for reasons not to invest!
You need to be prepared to put in a lot of time and still say “No”, if you're not entirely comfortable about it, or find it doesn't quite suit your own needs or preferences on risk and reward, or if you honestly just don't understand it, or if you have even small lingering doubts about it.
You should not push away and bury these thoughts. As with rule number one in 4thWay’s 10 P2P Investing Principles:
Further reading – pages linked to above:
Join our collective for better returns. Read HNW Investors: Harness Your Power For An Even Better Deal.
Find out what other risks are in this kind of lending and how to reduce them in The 13 Key Peer-To-Peer Lending Risks.
Anyone and everyone following all of 4thWay’s 10 P2P Investing Principles will have been satisfied with their lending results!
The 4thWay® PLUS Ratings are calculations developed by professional risk modellers (someone who models risks for the banks), experienced investors and a debt specialist from one of the major consultancy firms. They measure the interest you earn against the risk of suffering losses from borrowers being unable to repay their loans in scenarios up to a serious recession and a major property crash. The ratings assume you spread your money across hundreds or thousands of loans, and continue lending until all your loans are repaid. They assume you lend across 6-12 rated P2P lending accounts or IFISAs, and measure your overall performance across all of them, not against individual performances.
The 4thWay PLUS Ratings are calculated using objective criteria that can be measured and improved on over time, although no rating system is perfect. Read more about the 4thWay® PLUS Ratings.
Independent opinion: 4thWay will help you to identify your options and narrow down your choices. We suggest what you could do, but we won't tell you what to do or where to lend; the decision is yours. We are responsible for the accuracy and quality of the information we provide, but not for any decision you make based on it. The material is for general information and education purposes only.
We are not financial, legal or tax advisors, which means that we don't offer advice or recommendations based on your circumstances and goals.
The opinions expressed are those of the author(s) and not held by 4thWay. 4thWay is not regulated by ESMA or the FCA. All the specialists and researchers who conduct research and write articles for 4thWay are subject to 4thWay's Editorial Code of Practice. For more, please see 4thWay's terms and conditions.