Prosper.com Update

I wrote about Prosper.com in January. I had good things to say about it.

While my experience hasn't changed, it appears that other Prosper users have been having a tough time. The Motley Fool recently reported that Prosper either lied to a court or its users about the nature of its business in a bankruptcy suit.

The Motley Fool reported that since June 2008, 18.5% of the money lent out at Prosper probably won't be paid back. The article does not distinguish between the borrowers' credit quality. It might be that the riskiest loans are failing, which is no surprise. All my loans (I only lent to borrowers with the highest credit quality) have either been paid back in full or are current. So far I got a pretty good rate of return.

Update: A big thanks to the person who left the comments below. I wrote previously that Prosper filed for bankruptcy. That isn't true.


Out of Fannie Mae

I bought some Fannie Mae (FNM) calls ten days ago. I just sold them for a 35.71% profit. They might go higher, but the original plan was for Fannie to be between $7 and $8 a share. It did that this morning. I put a stop limit at $0.95 when the calls traded for $1. I got stopped out at $0.95 shortly thereafter.

Lessons learned:

1. Don't jump into the trade right away. I should have waited a bit. For two days after I bought, FNM went down by double digit percentages. I could have bought the same calls at $0.50 or even $0.45 instead of $0.70.

2. Closer to the money calls would probably be a better idea. I bought the $0.70 calls (Dec '08 12 strike) because they traded below the 13 strike (that was rather strange) and because I didn't want to lose much if they ended up going to zero. In retrospect, I probably should have bought fewer calls at the 6 or 7 strike. I'd probably save on commissions.

Overall, though, I'm happy with my little gamble. Thank you Barron's for the scary article that'll probably turn out correct in the next couple of months. I wouldn't be surprised, though, if a government bailout rescues FNM and FRE shareholders. This country has always had a socialize the losses policy for "too large to fail" institutions.

Update: The December '08 12 call closed at $1.49. My 35.7% gain is pretty good, but had I waited a while longer, I'd have doubled my money. Oh well. There will be other opportunities for gambling. If FNM goes over 10, I'm going to see about buying puts.


Does What People Search For Have Predictive Value?

Vlada at StockWeb has posted an interesting article on which keywords attract blog visitors from search engines at different times, according to how the market is doing. I've noticed the same trend at my own blog.

It seems to me that visitor trends may have some predictive value. It's sort of conventional wisdom that retail investors try to get in on a trend just as that trend has run its course. (And in hindsight, symptoms of trend reversals are easy to spot. For example, a number of companies funded share buybacks and dividends by borrowing money in 2006/2007. That was a great time to short the market.)

For instance, visits to this site from readers looking for bear market ETFs peaked around March 8th, 2008. The market raced up over 10% from that point until mid May. The same thing happened in late January through early February, when the market reversed course and went up.

Visits from people looking for information on investing in agriculture seem to peak when uptrending commodity prices are about to reverse course.

Of course, search engine ranking, which changes constantly, has a lot to do with how many people come here looking for a particular topic. For example the number of people searching for inverse ETFs may be constant, but as my site moves up and down in the search results, the number of visitors waxes and wanes.

But I think there is something to the predictive value. In the summer of 2007 I was still contemplating legal work. Over two thirds of the jobs advertised were for mergers and acquisitions. That's when M&A activity started drying up.

So, perhaps it'll be a good idea to start investing in stocks when the majority of job ads on legal career sites are for bankruptcy lawyers? It would be interesting to see.

While this site's number of visitors has gone up dramatically since it was first started in December 2007, the number is still fairly low. So my visitor peaks and troughs for various topics may not be very accurate in predicting market trends, if they have any predictive value at all.

If I have time (school's starting soon), I'll be using Google's Adwords tool, which provides approximate monthly search volumes for keywords of one's choice. Just offhand, there were approximately 1,300 searches for inverse eft in July, significantly below the average volume of 2,900. July 15 marked this year's stock market low (so far). Too bad Google doesn't provide daily figures. I'd be curious to see what portion of the search volume came before the 15th, and what portion came after. We'll see what August's figures have to say.

A few things about Google's search volume for particular keywords. Google isn't the only search engine out there, and its trends may be different from other search engines. I don't think this will make the results inaccurate though.

There's also the concern that those who search for inverse ETFs aren't necessarily bearish--maybe they're neutral, or even bullish (maybe they want to short the ETFs or buy puts). I don't think this one will skew results much.

What can skew results, however, is that monthly searches for things like inverse ETFs most likely leave out all those bearish investors who have previously searched for the term. For why would they search for the same thing twice or more when they likely obtained all the information they needed the first time?

It's most likely a silly fantasy, but it would be cool if search engine volume could be used to make a sort of optimism/pessimism index similar to one the main character in Galbraith's satire used to make a lot of money.


Indexing is Great, But Don't Forget to Diversify

A real estate boom spurred by unreasonably low interest rates and the collapse of lending standards leads to a bubble, which bursts. Over leveraged financial firms face staggering losses and struggle to raise capital. The government tries desperately to to prop them up as losses mount.

Am I describing our current crisis, or Japan's 18 years ago? A number of experts, including Morgan Stanley's Stephen S. Roach, have compared today's credit mess with the bursting of Japan's real estate bubble in the 1990s. If the comparison is apt, investors in broad stock market indexes like the S&P 500 may be in for a tough decade.

Here is how Japan's stock market fared after the bubble burst in 1990:

An investor putting a monthly amount in the Nikkei 225 before 2003 would be much better off keeping that money in a bank account instead.

There's a reasonable chance that a decade from now the S&P 500's chart will look similar. The last ten years haven't been so great either. Investing a monthly amount into the S&P 500 from March 1998 through August 2008 would give you an annualized return of around 1%.

A diversified portfolio, which, in addition to US stocks, includes bonds, REITs, international stocks, commodities and other asset classes would have done better. Putting equal monthly amounts into index funds tracking the S&P 500, bonds, international stocks, and REITs would garner an annualized return of around 4%. Certainly, 4% is nothing to brag about. But those three percentage points make a sizable difference. Investing $1,000 a month into the S&P 500 over the last decade would result in a portfolio worth a little over $132,000 today. Investing $1,000 a month split evenly between the four different asset classes would be worth a little less than $178,000 today.

As retail investors (and most mutual fund managers) are terrible at picking individual stocks and market timing, index investing is the way to go. Just remember, don't put everything in one asset class. If we have a lost decade like Japan's, a diversified portfolio should offset losses in the US stock market.

That's one of the ideas behind my ETF portfolio. In its first two weeks, it's lagging the S&P a bit. Come back every once in a while to see how it does.