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A Rant On “Past Doesn’t Mean Future”…Does It?

By Matthew Howard on 27th January, 2017 | Read more by this author

It can be a little exasperating to see individual lenders using the comments section under my articles on 4thWay, or in their emails to me. The main cause of the exasperation is when they write something like this:

“I've earned good money with that P2P lending site so I'm happy to keep lending.”

In other words, because they've earned money – and not lost it – for a few months, they think they're going to keep on earning money and not losing it in future.

Problem is, many of Maxwell’s or Madoff’s customers will have said the same. Even shareholders in Tesco and BP would have said the same!

You can't look to how good the performance of your investments were in the past because that tells you nothing about the risks of investing today. “Performance” doesn't even rhyme with “risk”.

People who should know better

There are far worse culprits that can – and surely do – cause a heck of a lot of damage.

I'm talking about ignorant media pundits – of which there are far too many calling themselves experts when they know nothing of investing, or lending risks, and can’t even spell “heterogeneous loan book*”. These people all too frequently talk about “dipping your toe in”.

Try it for a few months and see how it goes, they say. These guys have an awful lot of BS to answer for. (My next investing tip: sell investment punditry! OK, aside from 4thWay's.)

Then they cover their backs with the mantra “past performance does not guarantee future results”. But by that point no-one is listening.

What can you do instead?

That doesn’t mean you can’t and shouldn’t look at history and especially recent history.

But you have to look at the facts about the P2P lending site itself, focusing on the risk factors, to see what the future might bring.

Are bad debts low? Are they rising in newer loans? Are lates rising? How do those bad debts compare to the most similar competitors? Has the P2P lending site failed to get new investment from its shareholders when it needed to? Has it suddenly stopped providing important information? Does it appear to have highly skilled people with all the banking experience you'd hope to see? What interest rates are on offer today (not in the past) and are those rates appropriate given the risks now, which you have just looked into?

So your goal is to learn more about what the risks are and how to measure those and keep tabs on them. I don't want to hear you say again that you've dipped your toe in. Properly assess the risks so you can make confident decisions.

Seeing your past results is not one of the ways to do that. It's not even a consideration.

Further suggested reading:

4thWay's 10 P2P Investing Principles.

The 13 Key Peer-To-Peer Lending Risks Risks.

*Alright, I had to use a dictionary too. I always miss that last “e” out. When 4thWay's risk modellers talk about heterogeneity and monotonicity in a P2P lending site's loan book they're basically talking about how smoothly the interest rates and bad debts rise among the different borrower grades. They're looking to see that the P2P website understands its borrowers well enough to categorise them correctly and charge them the right amount of interest. They're also showing off like lizards.

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