Regruntled.com

Prosper is a peer-to-peer lending plaform, an eBay of unsecured personal loans. The premise is that banks take in deposits at low interest and lend them out at high interest, so there is an opportunity to disintermediate the banks. The borrower gets a lower rate, the lender gets a higher rate, and Prosper gets a little something in the middle for matching the borrowers and lenders.

I am a lender at Prosper, with $200 of edutainment money. You can see my loan portfolio if you like. It’s been a fascinating experience, reading people’s sob stories and bidding on the loans. Prosper would make a great hobby, at the $2000 level or so, where you’d have decent diversification and receive enough money in payments to make a new loan every three or four weeks. The hobby would keep your interest and pay for itself besides.

I think there is an agency problem. Prosper offloads all the risk to the lenders, so there is no direct incentive to collect on the loans. On the other hand, Prosper is a start-up with $40 million in venture capital, so there is a strong incentive to scale up as rapidly as possible by whatever means are available. In my judgment, Prosper has to scale up from $90+ million in outstanding loans to about $7 or $8 billion. The US consumer debt market is $2.5 trillion, so it is certainly possible.

The result is that a lot of lenders have been sucked in by the marketing hype and ended up with much lower returns than they expected. There is a large community of lenders, many of them disgruntled, both on and off Prosper, for example at Prospers.org. If you’re even thinking about lending on Prosper, read the forums and learn from the mistakes of others.

As for me, I’ve stopped lending at the edutainment level. It’s still early days. Prosper is changing, lender behavior is changing, and there are competitors on the horizon. Someone will get it right, and peer-to-peer lending may become a viable asset class for investors.

However, all the things that make Prosper unattractive for lenders, work to the borrowers’ advantage. If you want to borrow money, by all means check out Prosper! Read the forums, and study which stories get funded and which don’t. You may be able to borrow on excellent terms at Prosper.

Congressman Ron Paul of Texas is running for the Republican nomination for President. I’d estimate his chances at approximately zero. Intrade gives his chances at 7.5%. Intrade is an online prediction market, the modern equivalent of a bookie. There are people betting for Ron Paul, and people betting against him, and 7.5% is where the market clears. Of course, this is a new millenium and we don’t talk about making bets, we talk about buying and selling contracts. It amounts to the same thing.

The trade is obvious: sell Ron Paul short at 7.5 and cover at 0. Can it really be this easy? It’s a short sale, and Intrade requires a margin that doesn’t earn interest. The contract runs through August 31, 2008, after the Republican convention. The trade works out to about 9% annualized. For all intents and purposes, the nomination will be over by the end of January, after Iowa and New Hampshire, so I can probably cover then, if not at zero then close to zero. I wouldn’t be surprised to see a 20% annualized return on this bet, I mean investment.

Or I could look at this in a “Wisdom of Crowds” sort of way. The people at Intrade know something that the mainstream political pundits don’t, and Ron Paul really does have a snowball’s chance in hell of getting the nomination. Nah… I don’t think so. Al Gore has a better chance of getting the Republican nomination. I think there are libertarians and conservatives at Intrade who are betting on what they want to happen, not what they would rationally expect to happen. However, there is a lot of enthusiasm on the internet, and you can read “Ron Paul Can Win” for the Paul supporters’ case.

Or I could look at this as psycho-financial arbitrage. I like Ron Paul. I’d like to see him get the nomination. I voted for him when he ran for President as a Libertarian in 1988. So I sell him short at Intrade. If I’m right and he doesn’t get the nomination, I make some money. If I’m wrong and he does, I have the satisfaction of seeing him run and voting for him in the general election. If I bet, I mean invest, the right amount, on balance I come out ahead either way. Such a deal.

I have $250 of edutainment money on its way to Intrade. If Ron Paul is still at 7.5% when my account is cleared to trade, I will sell him short.

Plum Creek Timber (PCL) owns 8.2 million acres of timber in 18 states. Divide the market cap by the acres and you get about $900 per acre. Cheap land, professionally managed, 4% dividend. Land and timber are hard assets, so they should stay even with inflation, plus GDP growth. You’re diversified across 18 states, so there’s less risk from natural disasters.

But wait, there’s more! If the price of lumber goes down (can you say “real estate bubble”?), management can always just… do nothing. The trees will keep growing, and when the price of lumber goes back up, the trees will be bigger. As opposed to corn, which will rot in the fields if it isn’t harvested. The only downside is that there is no specific acreage that you can walk on, no actual trees that you can hug.

All in all, and over the long term, virtual timber should provide a return comparable to that of stocks. PCL, a single company, is riskier than a broad-based index like the S&P 500, but a little bit of PCL should reduce overall portfolio risk.

Disclosure: I do own a few acres of virtual timber.