Social lending with auxmoney.com

I recently stumbled upon the social lending platform auxmoney.com, also known as person-to-person lending or P2P Kredit (German) It works almost like eBay: People that need financial support create personal credit projects and offer them for a certain repayment rate (in yearly percentage of the sum lent). People that plan to invest pledge to fund usually only a small share of the project, so that in the end many people with small amounts finance a large project. When there are more people interested in investing so that the project's cost is over-financed, the repayment rate might go down due to price competition (underbidding). This way, the borrowers participate from investors competition, while investors have the chance to support projects they like while retaining the best return rates among the projects offered.

Investing is really simple and well organized: Choose any project you find worth supporting. The time span for refunding goes from one to five years (in 6-month steps), but within 12 to 24 months you cannot usually expect more than 11% annual rate of return. For the maximum time of 60 months it's possible to get up to 15.9% of the invested sum (minus some marginal fees), but the time frame seems rather large for this kind of highly-speculative kind of investing, the monthly income very low and the chance that a deptor goes bankrupt is uncalculatable.

Investment risk is left to your considerations, but loan takers can buy certificates from well-known credit rating agencies to demonstrate their credibility. Their score is shown in each project and you may choose if the risk score is OK for you. Auxmoney provides statistics showing the percentage of projects that couldn't be payed out in correlation to the scores. Decision-making on the criteria may seem very mechanical, inhumane or unfair, but in fact it's exactly the same what banks do, and here people at least always have a chance, if investors are willing to take the risk.

To sum it all up:

Advantages

• Social lending is an interesting concept that helps people that might not get a regular loan from the banks otherwise. This might or might not stem from their own faults, it's simply yours to determine if the risk is worth trying,
• High repayment rates from 10% to 15.9%,
• Not long after investing, you get your first repayment. I think this is the most important point here, because it is significantly different from an usual savings agreement, where your money is gone until its time has run out. At auxmoney you can reinvest your monthly income immediately into other projects which maps directly to compound interest; or consider it as an immediate pension. Nice!

Disadvantages

• The platform itself is not very professional, the link structure illogical. The separation between project bidding and financed project management seems unnecessary; you don't know really who you're dealing with, auxmoney or creditconnect, or KSW bank? Actually it's all of them, which doesn't feel safe at all.
• Online support is really bad, I wrote three messages and emails, none of them were answered. Imagine something goes wrong, you have no way of complaining. I called them once, and this mode of communication worked quite well. They redirected me to creditconnect and helped me immediately on the phone.
• After a project is fully financed, you're notified by email, but you have to download the contract at creditconnect. You have to transfer you part of the money to some bank account, which is - surprise! - not at the KSW bank, but the UniCredit Bank / HypoVereinsbank, again not feeling safe. The confirmation that your money arrived comes some week later. No one tells you that you have to sign each contract by hand and send it in (7 pages); a real disadvantage over ebay, I'd say, since most people recommend to invest no more than 50€ to 200€ per project, resulting in many fragmentary project contributions. Update: You don't need to send them in, it's sufficient to open the contract details page online, which in term is considered as your approval to the contract.

In the future I will post some updates to this post, when the first money rolls in, or when the first debtor goes bankrupt... Happy investing!

Update 2011-03-30

The first contract went through the whole process, and credit connect presents it really nice: You can see the stats for the loan, that effective income return over all months, your part of it and what has been paid so far. In the lower part of the details site there is a long listing for all months, with date, amount to pay, repayment, interest, your monthly amount and your percentage of all the investors for the project. Seems all very neat and clean so far.

Links

Here are some links on auxmoney: The web portal of auxmoney.com, the connected project portal at creditconnect.de for financed projects, Süd-West-Kreditbank (SWK), and the residual debt insurance Cigna.

More reviews (all in German) may be found here.

Another well-known social lending platform is smava, explained here. In Switzerland, there is chashare.

Rule #1 Investing, by Phil B. Town

ISBN: 978-2-905-21131-9
Random House Business Books 2007

(Rule #1 is a Trademark of Phil B. Town)

Yes, this actually is one of those books along the line "how to earn a million dollars and become dirty rich", although the time frame of investing is more like 25 to lifetime, with the aim of having a pleasant and carefree retirement.

This is one of the good points about this book, because it gives the reader some relation of not expecting too much too soon. On the other hand the general spirit is that everyone can become a millionaire by applying some simple rules, because we as small private investors have some inherent advantage over large fonds investors. There are some very true and noteworthy points explained very straightforwardly in this book.

I assume that Phil Town has had some major success in his stock investing, becoming a millionaire, but selling a book and speaking to hundreds of thousands of people is a much safer way to a relaxed retirement after all; but this conjecture, I guess, is very common for this kind of literature and line of business, so no surprise here.

Town refers to Benjamin Graham (born Grossbaum) and Warren E. Buffet as being his main influences regarding value investing. He strongly agrees with their approaches to investing, but tries to simplify the whole process, because he doesn't want to claim being a market research genius like those idols, therefore resorting to basic formulas and research.

In the following paragraphs, I'd like to pick out some points that seem important to me.

Ethical investing

This important point, according to my opinion, boils down to meaning in Town's "Four Ms" criteria. In a nutshell, it says that you should only invest in something you understand and you believe in, which maps directly to having lower risks by knowing the business and competitors well, and building a better market by feeling personally responsible for the business you own, instead of just juggling with charts and impersonal numbers without caring what it entails ethically. This is meant in a way like "if everybody would act like that (investing only in what you believe in), there wouldn't be as much and large bubbles, and maybe less people investing in ethically questionable businesses like armament industry or environment-unfriendly production methods". Less fluctuations at the market would of course lower the profit margins and number of opportunities for investors, but on the other hand would stabilize the economy in a way yet unknown which might reduce global losses and speed up overall market development significantly.

General applicability

A critical point in Town's criteria is a company's 10-year average growth rate: Only companies that have a steady and reliable growth in several key numbers like Return On Invested Capital (ROIC), Equity / Book Value Per Share (BVPS), Sales and so on, are considered to have a wide moat (one of Town's "magic" Ms), that have proved to be competitive enough to be considered owning shares from. During my explorations of Town's ideas, I haven't found one single company, of which I can either find enough and reliable data or for which I could confirm such a steady historical growth; and of course just tomorrow everything can change to the worse, even if I found such a Kinder surprise.

So, if after long researching I would have found the perfect company for me, there are many more obstacles to overcome: It not only has to have a steady growth in every respect, at the same time it needs to be undervalued by the market, which seems fairly unlikely taking into account that Town demands at least 15% growth rates.

This being underrated is called Margin of Safety (MOS), a term coined by Graham, and is a tricky thing working like that: By using current Earnings per Share (EPS) and estimated future Equity growth rates, extrapolate future price and earnings. By demaning a minimal outcome of 15% per year, we can calculate back at what price we must buy the shares to have a 50% MOS now. This helps setting us a (non-automatic) buy-limit for the next years, until eventually (if not immediately) the price is so low that we are safe to buy, unless some obvious crisis is in the business. Whenever the stock price is or falls below that MOS-price, we are allowed to buy with a much reduced risk of losing something, because we assume the stocks are widely underrated and even if something goes wrong, we won't lose much or still make some marginal win, because in the long term prices in the market will return to their businesses inherent and true price, which is at least the double of what we paid for acquiring the shares, giving us some safety net.

Market timing

Even if you buy businesses as if you own them for lifetime, always check the signs to get out of a stock: Town lists three very simple indicators that can be applied on a daily or weekly basis. This is really simple and always works.

Summary of the book

You can find my short summary of all the book's contents for your convenience here.