Le Fly has suggested that you should keep less than 50% of your net worth in stocks. This advice has stopped me from inserting my knob all the way into the Wall Street Glory Hole, a hole that often turns out not to be glorious. Instead, it’s just another dick chopper in camouflage.

Prior to 2008, banks were willing to lend to anyone. If you owned a mud hut on the banks of the Zambezi and could scrawl an X for a signature, you were deemed credit worthy. When the credit bubble popped, the economy was no longer awash with easy money. In real terms, this meant people were unable to tap their home equity to pay off their credit cards.

From this credit black hole, a “new” concept called Peer-2-Peer lending emerged. Among the first crop of P2P lending companies, which has managed to stay the course is Lending Club. So much so that stock in the “second market” for lending club has become a rising star. They take care of the screening and data mining. To date, they have denied $4.5B in loans and funded $400M, a statistic that has made it easier for me to give my cash to strangers on the internet.

Potential investors are provided with the following pertinent data: FICO score, delinquency history, DTI ratio, revolving credit balance and employment verification, etc… the kind of data that would have stopped the housing bubble dead in its tracks. You can choose to invest as little as $25 per note. Alternatively, for the gamblers out there, you can just give $35k to a Wal-Mart employee in Idaho and hope for the best.

The loans are rated from 6% (A) all the way to 24% (G). The higher the expected rate of return, the higher risk of default. It’s reminiscent of how ratings agencies are supposed to work. The average default runs about 3%, and the average rate of return is around 9%. Lending club takes around 0.65-1% for the privilege of doing business. It is their responsibility to chase up late or delinquent payments. There is even a trading platform where you can sell your notes.

The art in all of this is being able to effectively screen notes. I have developed a simple screening strategy. When common sense criteria are fulfilled, I launch $100 bills in their general direction. If thier loan is not completely funded, they will be asked to provide more supporting information or be voted off the island.

Cutting out the middle man from the equation benefits small time investors in a big way. 13.03% YTD is not to be sniffed at. It also helps people already in debt to refinance for considerably better rates. It’s my own way of whispering a mousey “fuck you very much” to the banks and the credit card companies.

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