boble
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Post by boble on May 29, 2016 11:21:47 GMT
Put simply, all investments have an associated risk; it is for the investor to determine that risk and decide whether they are comfortable with it. With regard to SS in particular, I make the following observations: - The potential rewards are very attractive
- The likelihood is that the default loan rate will be no greater than 10% of the total number of loans
- A default loan does not mean 100% write off; worst case the security property will not sell for less than 50% of valuation, and probably better than this
- There is a reserve fund the purpose of which is to assist lenders in the event of a loss
Using the above assumptions for illustrative purposes, a lender may wish to asses their risk as follows:
Loan value £100,000
Risk is 20% of loan value divided by 10 equals 2%
Therefore; average yield 10% per annum across a balanced portfolio
Interest profit over 12 month loan term £10,000
This does not take into account the reserve fund
Suggestion:
Reduce expectations to 10% per annum
If highly risk averse, do not invest!
Please note that these are my personal observations only and do not constitute advice. For the avoidance of doubt, I have no association, other than as an investor on the platform, with Saving Stream
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tx
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Post by tx on May 29, 2016 12:25:39 GMT
This is a very complicated subject, and players in the P2P market would have different views and subjective risk models. I came from a quantitate background and in my mind I would like to build a quant model to address every possible risk factors and quantify them. When all data as crunched it will give me scores and I will exit from high risk and enter low risk loans. Loans not meeting minimum requirements will never be considered.
These loans has fixed income but definitely not fixed income securities as they are not interest rate sensitive and hence has no yield curve as such. Or the yield curve is flat.
But I am sure every one on SS recognise the main risks are credit risk and early repayment (reinvestment) risk and liquidity risk. It is then upto everyone of us to quantify, or qualify, them.
Another point, when your return is fixed at 12%, the individual loan sharpe ratio is very easy, you don't even need the 12% to calculate in order to compare, the lower risk the higher sharpe will be. The question becomes, what is your calculated risk to input to sharpe ratio?
But if you like consider a portfolio wide sharpe, then correlation come in play. What do you think, in normal market, the risk correlation between loans? Is 0 a good assumption? You got the idea, if you know the idea of Sharpe. I therefore think sharpe is bit overkill to assess, because there is only one driving factor, risk; risk adjusted return assessment is unnecessary. My view anyway.
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boble
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Post by boble on May 29, 2016 13:02:40 GMT
This is a very complicated subject, and players in the P2P market would have different views and subjective risk models. I came from a quantitate background and in my mind I would like to build a quant model to address every possible risk factors and quantify them. When all data as crunched it will give me scores and I will exit from high risk and enter low risk loans. Loans not meeting minimum requirements will never be considered. These loans has fixed income but definitely not fixed income securities as they are not interest rate sensitive and hence has no yield curve as such. Or the yield curve is flat. But I am sure every one on SS recognise the main risks are credit risk and early repayment (reinvestment) risk and liquidity risk. It is then upto everyone of us to quantify, or qualify, them. tx, my post is intended to be simple. Clearly, based on this forum, the majority of investors on SS are not sophistcated property investors or private lenders. They are in the main people merely seeking to earn a good return on their money, many, to supplement their income/pensions.
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tx
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Post by tx on May 29, 2016 13:22:15 GMT
Agree, then I would see over simplifying the risk assessment is another source of risk for investors. I see investment a displined profession, risk assessment at heart of it, I can never take it lightly or over simplify it.
There are tools and concepts to help the mental or formal assessment, whatever chosen. Rule of thumb or heuristic may work well, but only after rationale behind is proven solid.
That's why I see investing in loan with negative days is irrational, and it still doesn't make rational even when a person is in the "main" stream of suppliment income. I, personally, and feel free to disagree, that this is a clear example in heuristic beak-down in risk assessment.
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mikes1531
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Post by mikes1531 on May 29, 2016 14:09:43 GMT
- The likelihood is that the default loan rate will be no greater than 10% of the total number of loans
- A default loan does not mean 100% write off; worst case the security property will not sell for less than 50% of valuation, and probably better than this
<snip>
Risk is 20% of loan value ...
: One question and one point... How did you conclude that 10% was a reasonable default rate? If a loan was made at 70% LTV and the net recovery is 50% of LTV, the loss is 20% of the security value, not 20% of the investment. So it's actually 29% of the investment (20/70=29%).
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boble
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Post by boble on May 29, 2016 14:14:39 GMT
Agree, then I would see over simplifying the risk assessment is another source of risk for investors. I see investment a displined profession, risk assessment at heart of it, I can never take it lightly or over simplify it. There are tools and concepts to help the mental or formal assessment, whatever chosen. Rule of thumb or heuristic may work well, but only after rationale behind is proven solid. That's why I see investing in loan with negative days is irrational, and it still doesn't make rational even when a person is in the "main" stream of suppliment income. I, personally, and feel free to disagree, that this is a clear example in heuristic beak-down in risk assessment. tx,I too fail to understand the merits of some investors investment in Saving Stream, however, that is another matter entirely. Quantum suggests that you are an investor on Saving Stream, yet you appear to be saying that it is irrational to invest on the platform. I am delighted that you have devised an infallible formula and hope that you earn a huge amount of money on the back of it and don't incur any defaults along the way. You could further capitalise on this by setting up your own P2P platform. I am also sure that you will have every bank in the world hammering down your door offering you billions for the formula. Heart felt Congratulations!
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oldgrumpy
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Post by oldgrumpy on May 29, 2016 14:37:54 GMT
.... I am delighted that you have devised an infallible formula and hope that you earn a huge amount of money on the back of it and don't incur any defaults along the way. You could further capitalise on this by setting up your own P2P platform. I am also sure that you will have every bank in the world hammering down your door offering you billions for the formula. Heart felt Congratulations! Eh? Wots this? Has the the Horace Batchelor of P2P just been "outed"? Wannabe my friend? 
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tx
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Post by tx on May 29, 2016 14:38:18 GMT
I failed to understand investing in "negative days", and think that's irrational.
The formula of Sharpe is decades old, and Sharpe won Nobel prize for relevant work I think. A tool that every asset manager used, why not borrow if sonthing is good and useful.
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boble
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Post by boble on May 29, 2016 14:45:10 GMT
- The likelihood is that the default loan rate will be no greater than 10% of the total number of loans
- A default loan does not mean 100% write off; worst case the security property will not sell for less than 50% of valuation, and probably better than this
<snip>
Risk is 20% of loan value ...
: One question and one point... How did you conclude that 10% was a reasonable default rate? If a loan was made at 70% LTV and the net recovery is 50% of LTV, the loss is 20% of the security value, not 20% of the investment. So it's actually 29% of the investment (20/70=29%). No science here, just based on my knowledge and experience and the level of due diligence/caution SS need to exercise to protect the platform/their business. I think that my figures are correct, however, they may well not be.
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Greenwood2
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Post by Greenwood2 on May 29, 2016 14:54:52 GMT
...
Risk is 20% of loan value divided by 10 equals 2%
... Why?
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pentode
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Post by pentode on May 29, 2016 14:55:29 GMT
That's Kensham ..K-E-Y-N-S-H-A-M ...
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Liz
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Post by Liz on May 29, 2016 15:37:34 GMT
boble: One question and one point... How did you conclude that 10% was a reasonable default rate? If a loan was made at 70% LTV and the net recovery is 50% of LTV, the loss is 20% of the security value, not 20% of the investment. So it's actually 29% of the investment (20/70=29%). No science here, just based on my knowledge and experience and the level of due diligence/caution SS need to exercise to protect the platform/their business. I think that my figures are correct, however, they may well not be. They are wrong; Take a £1000 valued asset, borrows £700, 50% recovered leaves £500 recovered and £200 loss. 200/700 is a 29% loss. You weren't far off.
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tx
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Post by tx on May 29, 2016 16:01:06 GMT
Are we trying to construct a default probability function here? Do we have historical data?
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boble
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Post by boble on May 29, 2016 16:56:25 GMT
No science here, just based on my knowledge and experience and the level of due diligence/caution SS need to exercise to protect the platform/their business. I think that my figures are correct, however, they may well not be. They are wrong; Take a £1000 valued asset, borrows £700, 50% recovered leaves £500 recovered and £200 loss. 200/700 is a 29% loss. You weren't far off. Thank you Liz, does this mean that I got the bottom line right and just got there a different way?
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Post by brianac on May 29, 2016 17:54:58 GMT
Can someone translate all this thread for us <Proles> please?
Brian
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