When we last visited my Lending Loop portfolio, I was doing approximately 9% annually from lending small businesses cash at exorbitant interest rates, which was pretty solid in my books.
Unfortunately, 2018 was not such a good year, although that should just be a one-off occurrence. Let’s take a closer look.
Lending Loop — 2016 vs. 2019
I first joined Lending Loop at the beginning of 2016. It then promptly ran into some regulatory issues and wasn’t really ready for business until late in the year. I stuck with them though, and by early 2017 I was up and lending.
The problem back then was a very poor selection of loans. Lending Loop had plenty of investors looking to earn some interest but very few companies looking to borrow. You really had no choice but fund everything that got offered.
As I previously mentioned, one of those loans did poorly, and it was finally officially written-off in 2018. The good news is the company did repay about 30% of the loan before defaulting, and the company is about a three hour drive away if I want to take out my frustrations on some of the owners’ personal property. If only I knew who they were. And I wasn’t a giant wuss.
When I first put cash into Lending Loop I simply invested 20% of the portfolio into every loan I liked. So this write-off turned out to be approximately 13% of the original portfolio. I’ve since invested more money, which reduced the write-off to approximately 4.5% of my portfolio.
So that hurt 2018 Lending Loop returns. And since the additional investment wasn’t made until the third quarter of 2018, my new investments haven’t really had a chance to add to the bottom line. So 2018 will go down as a losing year. I lost approximately 3% this year.
Don’t worry. I’m not
Lending Loop is way different than just a couple of years ago. The loan selection has improved exponentially.
Although there’s currently only three loans available to fund on the marketplace right now, there’s at least 10 that have raised all the allotted money in the last couple weeks alone. I used to get email notifications of new loans but I’ve turned them off because there were multiple loans being listed every day. It’s easy to build a diverse portfolio these days.
(Lending Loop also lets you auto-lend to any new loan on the platform. I like to be a little selective, so I haven’t turned that feature on. But it’s an easy way to automate diversification)
I’ve also tried to skew my portfolio a little bit to higher quality loans, with some success. Here’s what my current portfolio looks like today:
About 40% of my portfolio is in A and B graded loans, and C+ has 17% of the portfolio too. I’m trying to get some exposure to the riskier part of the market (and those 18-22% yields) while still skewing towards better credit quality.
(Many of the D-rated loans I have feature good earnings and solid balance sheets. Some of them I’d even categorize as being mispriced. We’ll see how they do over time.)
Right now my current annual yield is a little over 14%. Remember Lending Loop takes fees out of that, so I’m looking at approximately a 12% total annual return (assuming no write-offs).
Should you join Lending Loop?
I’m not sweating my 2018 Lending Loop loss. My portfolio went from five names to 27. It’s much more diversified these days, and is protected from the odd loan blowing up.
Besides, it’s fun to scrutinize the loans on the marketplace. There’s enough selection I can avoid certain borrowers for the dumbest reasons. It’s basically like a financial version of Tinder.
And Lending Loop does a nice job of providing the info needed to easily scrutinize your portfolio. They do a nice job with all that stuff.
I’m a big fan and continue to be a big fan. I’ll probably add funds to my Lending Loop account sometime in 2019.
I think y’all should join me. If you are interested, you can use my referral code (just click on this link) and we’ll both get a $25 bonus once you lend $1,500 to businesses.
It’s not very often I’ll talk about some closed-end fund on the TSX Venture Exchange (which is basically the trailer park of North American stock exchanges), but the Pender Growth Fund is actually pretty interesting.
The Pender Growth Fund (TSXV:PTF) isn’t like the average mutual fund. It doesn’t simply buy stakes in publicly traded companies. I’ll let the fund’s website do the explaining for me. No, you’re lazy.
Pender Growth Fund is a closed-end investment fund invests in opportunities identified by the Pender Investment team. The Fund aims to uncover unique investment situations in small but profitable companies, often in the technology sector. We invest in both public and private companies and look to invest in businesses that have hit an inflection point.
The Fund has invested in a number of publicly listed companies with an emphasis on established businesses requiring capital for growth, expansion or restructuring. In each situation, the Fund’s capital has been invested to improve the equity value of the company.
This results in, uh, some interesting holdings. A real list of blue chips right here.
Is that the worst Photoshop you’ve ever seen? Probably!
The joke was a crime against humanity too.
Uh, Italics Man?
This is Nelson’s mom. You’ve made him cry and he’s not coming back until you apologize.
Finally. All my dreams have come true.
You’ve also probably noticed the size of the fund by now. With just over $17 million in assets, the Pender Growth Fund is basically a rounding error when compared to most mutual funds. Even when looking at the closed-end variety, which are usually not big.
The size actually works to the fund manager’s advantage, since he’s not forced to make a whole bunch of investments to get all the capital invested. Remember, these are tiny companies Pender is investing in. They’re not putting much more than $1 million to work in any one of these organizations.
One note before we move onto how well this fund has done. It charges a big management fee. You’re looking at a 2.5% fee taken off the top every year, and the manager is taking an additional 25% of the profits on any returns past 6% annually. So if the fund returns 10%, the manager gets 3.5% of that. Some people might consider that a bit excessive.
Let’s put up a chart comparing the Pender Growth Fund to the TSX Composite Index (as represented by XIC, the ETF that tracks that index).
You see that red line that hasn’t done anything? You probably assumed it’s just symbolizing where zero is. No, it’s not. That’s the TSX Composite performance, which is up a little over 30% in the last decade. The Pender Growth Fund is up 2,553%.
To put it another way, the Pender Growth Fund went from $0.13/share a decade ago to $3.32 today. It’s actually down considerably from its 52-week high, which flirted with $5.
And that’s after those terrible management fees. Absolutely bananas.
You forgot all about the management fees once you saw those returns, didn’t you?
Should you buy the Pender Growth Fund?
Can the fund’s manager, David Barr, continue his glorious success with the Pender Growth Fund? That’s ultimately what this comes down to.
It has a few things going for it. With a current market cap of approximately $14 million — the fund’s value has gone down since it posted those top holdings — there’s still plenty of room left for growth. Barr is also portfolio manager of the Pender Small-Cap Opportunities Fund, another mutual fund that has absolutely crushed the market despite its high fees. You might argue he knows what he’s doing.
It’s hard to analyze the underlying holdings in a fund like this one. We’re putting a lot of faith in Barr and his team. These folks have performed in the past, but as we all know past performance doesn’t really mean squat going forward. Still, it’s obvious the people at Pender are good investors.
Finally, we have to remember there really aren’t many ways to get this kind of exposure in your portfolio. The Pender Growth Fund is akin to venture investing, something the rest of us can’t really access. Even if we could, I doubt we’d do a very good job at it. So it makes sense to have Pender doing it for us.
Ultimately, I don’t hate the set-up as it stands today. Sure, Pender gets paid generously when the fund performs well. But that’s okay, since their incentives are aligned with mine. They want the value to go up just as much as I do.
I don’t own this fund currently and probably won’t buy it because I lean dividend investing these days, but it’s interesting.
So last week we talked about AirBnb. I told you kids about how I had a garage I was interested in converting into an apartment, which had the potential to do a 40% annual return. That, my friends, is the very definition of succulent.
I won’t likely pursue this, for a number of reasons. First off, I’m kinda lazy. I don’t want to go and babysit a unit like that. Go somewhere else, you damn kids. I prefer more passive sources of income. And perhaps most importantly, after a short discussion with someone who is reasonably aware of local zoning laws, I was told my chances to convert my garage were slim to none. Interestingly, however, my chances of converting it into a bedroom or home office were good. Perhaps I’ll keep that in mind for the future.
It’s easy to argue I’m going about the AirBnb business the wrong way. If I was serious about it, here’s what I’d do.
All about protecting capital
Most people don’t have thousands of dollars to spare, just sitting around to convert space into something that can be rented out. Hell, most people don’t have space for their mountains of crap, never mind guests. Actually, I take that back. Most of us have too much damn space. We just like stretching out, that’s all.
Think about all the expense of buying a condo to rent out this way. You’d have to scrounge up at least 5% down — although 20% is more likely — spend money on insurance, taxes, and all the furniture it takes to make such a place happen. In a market like Toronto or Montreal, you could be looking at $100,000 just to get started.
That’s nuts, especially when we consider the uncertainty surrounding these types of places. At this point, most cities don’t care much about folks renting out apartments like hotel rooms. This could change, especially in cities that have high local taxes on hotel stays. The government always gets their cut.
The far easier way is to simply rent a place on a monthly basis and then use it as your base of operations.
The biggest advantage is it lowers the cost of entry. All you need to come up with is first month’s rent, last month’s rent, and cash for furniture. Instead of spending $100,000 to start, you’re looking at a bill of less than $10,000. Hell, if you’re a Craigslist master, you probably won’t need much more than $5,000 to get going.
Just stay out of the intimate encounters page, champ. ACTUALLY NO TAKING A HOOKER BACK TO YOUR AIRBNB PLACE IS GENIUS.
It also allows you to be nimble. Pick a bad location? No problem. You’ll lose one or two months rent, max. That’s far less than paying some broker 5% of the value of a condo to get rid of it. Being nimble is a good thing.
Expansion potential is much better, too. Earnings from one unit can easily be reinvested in another, which allows you to start building up an empire with very little capital out of your own pocket. Landlords like it too; it’s much easier to sue a business guy with some assets than a random dirtbag who rents an apartment.
Or, better yet, partner with your local landlord. Offer to do all the work for 33% of the profits. Or 20% of the profits. Whatever works for you. It’s better to take an even lower return in that situation, simply because you have no capital at risk. It’s the same concept as using seller financing, which is the ticket.
Wrapping it up
I’m a little skeptical this whole AirBnb thing will continue forever. I have nothing against the concept, I just think local governments will eventually ask these folks to start coughing up the same taxes hoteliers pay. This immediately eliminates AirBnb’s competitive advantage.
But there’s nothing stopping you from getting on the gravy train. The best way to do so is to keep as much of your money firmly inside your wallet. Capital is precious; use it wisely.
Because, hey, who should be a better credit risk than yourself? (Immediately defaults)
Here at the ol’ FU machine, we’re all about giving you kids some of the most unusual investing ideas out there. I’ve outlined everything from putting your cash to work lending dirtbags money to buying a storage locker business. And that’s just in the last month. I’ve come up with more odd investment ideas in the past six months than most people do in their lifetimes.
There’s a reason why I do this. Most investment bloggers (and, hell, personal finance bloggers too) do nothing but chronicle their very predictable actions. There’s very little to gain by retracing the beaten path. The real opportunities are in the bushes where nobody is looking. Probably because there are snakes. Or spiders.
At first glance, you may not realize the benefits of something like giving yourself a loan. Why would such a thing be beneficial? You’re literally just taking money from one pocket, charging yourself interest, and then putting less of it back in the other pocket. It seems like action for the sake of action.
But there are actually two very interesting reasons why you’d want to give yourself a loan. Let’s look at each of them.
Starting a company
Every company needs a certain amount of start-up capital.
Most people fund their companies in a very predictable way. They use their own savings as initial capital.
Say you bought a fast food joint for $200,000 and immediately incorporate the thing as its own business. You decide to put in $50,000 of your own money into the company as shareholders equity and lend the corporation the other $150,000.
Most people lend their corporation money interest free because they want the business to succeed. The business then pays back the loan as it can afford it.
But there’s no rule that indicates this loan has to be interest free. In fact you can, in theory, charge yourself all sorts of interest. As long as it’s considered to be the going rate, you’re good to go.
What most people do is research a little and see the rate a bank would charge them to do the same loan. If a bank would charge 6% in a similar situation, you could easily charge your corporation the same amount.
Remember that you’ll have to make this a legit loan. Paperwork will need to be done and the corporation would have to make the designated payments. You can’t just give yourself a loan and have the terms be “I’ll pay back whatever whenever I want.” Do you really want to make your accountant cry?
Give yourself a mortgage
This one is a little more complicated, but it can be lucrative for a very small percentage of the population. It turns out it’s possible to hold your mortgage in your RRSP.
It works something like this. There are all sorts of different investments you can put in your RRSP. It’s not just stocks, bonds, or ETFs, either. It turns out you can totally invest in certain qualified mortgages inside of your RRSP. This is how those private mortgage companies can get away with saying they’re RRSP eligible.
Even though I’m in the private mortgage business I’ve never examined the possibility of holding them inside my RRSP. As far as I can tell they need to be first mortgages only, and they need to be insured by one of the various agencies that do this.
It’s less complicated to hold your own mortgage inside your RRSP, although it’s certainly not easy. Here’s how it works.
- You pay someone to set up the deal for you. Only certain financial institutions will do so and you’ll have to pay CMHC insurance fees.
- You have to make sure that you have enough contribution room to pay for the whole house, not just the part mortgaged.
- The interest rate you give yourself must be competitive with comparable mortgages. I’m thinking you’d pretty much be locked into giving yourself a loan at 4.64% which is sure better than a GIC but could easily be beaten by stocks.
I’ve pretty much only touched on the basics. There are a number of companies that will do this for you. Do some Googling and talk to one of them before you get started. I’m not getting too involved in this because, frankly, I think it’s kind of dumb.
This is the end
It’s not that hard to give yourself a loan if you’ve got a corporation. There are a number of advantages for self-employed people to incorporate, as I outlined in this post. Getting a little interest from your own corporation is another, but you could argue that doing so is just shuffling money from one pocket to the other.
Ultimately, I won’t spend much time doing this, but it could very well make sense in certain situations. Your accountant can probably help out with this more than I can.
Finally! One of my terrible Twitter jokes can be used in context!
Too soon? Oh come on, that was a whole week ago.
A few years ago I had a brief infatuation with autographed memorabilia. I acquired such items as a Jerome Iginla hockey stick, a nicely framed Mark Messier photo, and a Taylor Swift CD. All of these are signed and include the critical certificate of authenticity. You gotta have that.
The Taylor Swift autograph was probably my best buy. I can’t remember the exact cost, but it was well under $100 including shipping. This was back in 2012 or so when she wasn’t quite as big as today. I spent $25 on a nice frame for it for a grand total of $100 or so. A quick search on eBay shows similar items for sale for US$250 or US$300.
These days, my autograph collecting hobby is on an indefinite hiatus. I find the whole practice silly, paying $100 or $200 (or more) extra for a nice framed picture just because it has somebody’s autograph on it. Dealers can get away with charging a premium for them because we trust them far more than some random with an eBay account and 41 positive feedback rating.
How to invest in collectibles?
Often, somebody like me who thinks autographed crap is cool will try to justify their collection by saying they’re going to invest in collectibles.
The logic goes like this. They spend a lot of money on some iconic piece that the average person can barely afford. A lot of thought is put into the particular investment. It has to be somebody who’s a big deal, and usually somebody who doesn’t produce a lot of memorabilia. That’s the right kind of supply/demand equation.
Usually they tend to invest in a celebrity’s stuff who’s kind of old, since they can envision the guy kicking it sometime in their lifetime. That’s the money event for collectors. The value of merchandise shoots up when the guy kicks it.
It’s a little bit messed up, isn’t it? The guy who invests in collectibles is basically waiting for some of his favorite celebrities to die.
There are other ways to invest in collectibles. Another method is what I call the shotgun approach. That’s when you buy up memorabilia signed by someone who’s somewhat famous hoping they’ll turn out to be a big star.
I know a guy who used to do this with hockey players. He went to Red Deer when Dion Phaneuf played for the Rebels as a 17 year-old and spent $100 on an autographed stick. Phaneuf went on to be drafted by the Calgary Flames and was a very big deal for a few years before being traded to the Toronto Maple Leafs. His popularity peaked and now he’s playing in obscurity in Ottawa.
The value of this stick went from $100 to a max of $300 or $400 back down to $100. It would have been a good investment if sold at the top. He did not.
The easy way to invest in collectibles
Speculating into the future trends of athletes and actors is a dumb way to invest. I wouldn’t even try to invest in collectibles. There’s more speculation there than there is in penny stock land.
That’s not saying you should never buy this stuff. If you’re like me and think having a Taylor Swift autograph on your wall is cool, then by all means. Just remember that it’s a purchase, not an investment. You may get your money back, but that’s about it. Everything else is just a bonus.
While I think investing in individual pieces of memorabilia is dumb, there is a way you can invest in the whole sector. Think of it as the investing in collectibles ETF.
The stock is called Collectors Universe, Inc. (NASDAQ:CLCT), and it is the go-to source for authenticating autographs. The company also grades sports cards, rare coins, and stamps.
It’s not a tiny company. It has a market cap of US$180 million and is profitable enough to pay a 6.8% dividend.
Revenue and earnings have been pretty flat over the last few years. Earnings in the company’s fiscal 2014, 2015, and 2016 came to $0.90, $0.87, and $0.89 per share, respectively. Shares trade hands at $20.46 each, putting shares at about 23 times earnings. That’s not exactly cheap.
Dividends are $1.40 per share each year, which means the company isn’t earning enough to cover its dividend. It has enough cash to make up the shortfall in the short-term, but issues could arise in a few years.
The autograph business is growing while the coin grading part isn’t doing great, although the weakness in coins did correct in the second half of the year. And the company has opened an office in China that authenticates gold, which should hopefully be a decent growth driver.
And that’s it. That’s the whole business. It’s the kind of simple niche business I like to invest in, although at much less than 23 times earnings.
That’s all folks
Collectors Universe Inc. is the easy way to invest in collectibles, a market which is growing. The company’s autograph authentication service saw 7% growth last year. It’s a much better choice than trying to figure out which terrible Carrie Fisher autograph will be worth something some day.
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