Taking out a prosper loan to buy stocks

[bad beetz]

The thread itself is making me feel unsettled... Angry.

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(from Shoe) I think the worst case scenario is I MIGHT only gain 10% instead of the 13% i am paying in interest.

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ARE YOU INSANE?! If the worst thing that could ever happen to you in the stock market was that you could at worst MAKE 10% you would be some sort of GOD. Instead you are a ridiculous silly person deaf to the mountain of logic laid out before you on this thread.

The worst case is that you lose quite a bit, get margin calls, and default on your prosper loan, the chance of which is not remote at all.

This thread makes me feel the way the screaming guy at the airport in front of me does, off about how he wants some airport workers' bosses' phone number because he threatened some guy on the airplane and got kicked off. In fact it makes me feel almost exactly like that.

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(From Evan) Can someone explain to me how the hell he's raised $15,500 on prosper already?

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I feel like this is the only silver lining. Are these beneficiaries protected in anyway or secured? My guess is no, although I'm not familiar with prosper.... I feel like the silver lining is that there must be some business opportunity in "Prosper-trage" if silly people will give you money to invest in Stocks.

[bad beetz]

I'll take that for 1K 1-1 odds

[bad beetz]

If you loan Shoe money on Prosper, he defaults, and you are trying to collect then you can lose huge when you hand it over to a collections agency, as they will deal with the creditor, and he may get off with paying half of what he owes.

You also lose huge if he files bankruptcy...

It's not "secured" by a credit rating, although it's definitely something. Shoe has good credit, doesn't want to bone it, plus he has retirement accounts he can dig into if he is faced with default (although those may be protected in bankruptcy, I don' know)

[bad beetz]

word. it would be arbitrage if you could make the EXACT SAME LOAN for a higher interest rate

[Sniper]

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Link to my loan request.

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first, 69% funded in 5 days, clearly there are people that support your plan.

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I don't want to get in a huge debate here if I can get better returns on my stocks vs. the interest charged on the loan (i have dealt with enough of those questions at prosper). I have done my own analysis and decided that I am more than willing to take that risk. I understand I could potentially lose a good chunk of change here. But I won't lose everything, as I will buy atleast 5 differnt stocks with a market cap over 1 billion. They aren't going to all go bankrupt, and if that 1 in a billion chance hits, then so be it.

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Also, obviously most of the posters in this thread didn't pay attention to your OP [img]/images/graemlins/wink.gif[/img]

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Here is the basis of the calculations I did to take on this loan request:

Assuming a $25k, 3 year loan at 12%, my total amount paid would be: $29,893.32.

Assuming the following average annual returns, I would end up with this much money:

6%: 29,917.01
10%: 33,704.14
15%: 39,098.60
20%: 45,328.80
25%: 52,518.68
30%: 60,813.38
35%: 70,376.25

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Did you compare the returns of your plan (after taxes and loan repayment) vs what your returns would look like simply investing $1K (or 830) per month?

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I don't want to get too cocky, so I am capping myself at a maximum annual return of 35%, which I actually think is achievable based on my opinion of my stock-picking ability. That is up for debate, not doubt, but I am not going to get in a pissing war here about stock picking ability. My main question is this, if you only achieve average stock market returns (8 - 10%) (and I am only 28 so have time in my favor), is this loan worth taking?

I understand the stock market could crash in the next 3 years or the dollar could crash or whatever else, but what are your thoughts assuming a normal market? Thanks in advance!

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Can you provide more detail on your investment plan?

Do you plan to stick it all in the market at once and hold those stocks for 3 years?
or, are you planning to trade or market time, etc?

Since margin has also been mentioned, do you also plan to further leverage your port?

How much time do you plan to spend monitoring your port?

And, do you have a risk management plan, if things go wrong?

Bottom line: I disagree that your plan should be shot down without further analysis, since you seem comfortable with the risk you are taking. So provide some more details...

[jfresh]

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The thread itself is making me feel unsettled... Angry.

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(from Shoe) I think the worst case scenario is I MIGHT only gain 10% instead of the 13% i am paying in interest.

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ARE YOU INSANE?! If the worst thing that could ever happen to you in the stock market was that you could at worst MAKE 10% you would be some sort of GOD. Instead you are a ridiculous silly person deaf to the mountain of logic laid out before you on this thread.

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didn't you read the entire thread? he clarified it as 'worst case scenario on average'. duh....

anyway, whether or not OP listens to all the advice, i learned a lot from everyone who has chimed in... if that is any consolation.

also, seeing as how this a poker forum, there are just so many parallels here with gambling.

OP: "However, I may be over-confident in myself and an almost certain I can beat the market, but at the same time, do not have the records to prove it. I feel like I have constantly picked great stocks over the years, but have never had the money to invest to prove it."
--replace 'beating the market' with 'winning at poker'. does that not sound like every poker player other there ever? how many actually winning poker players are there? sportsbetting is the same thing. everyone thinks they can beat the bookies. very few do.

Finally- I just started researching the stock market/investing/etc. I don't know how many times I've read index funds are the place to invest because even mutual funds where professionals are getting paid to pick stocks, rarely beat the index rate of ~10-11%.

[DesertCat]

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But I only need a 6% return to break even on my 12% loan. See my original post in this thread. Ok, that is not counting taxes. After taxes, I need an 8-10% return to break even on my 12% loan, depending on if I pay my 15% long-term captial gains tax or short-term ordinary income tax.

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Your math is very, very, wrong, and it's leading you to make a big mistake.

What you are missing here is that you aren't borrowing $25,000 at 13% for three years, you are actually borrowing about $15,000 on average during those 3 years, and supplementing it with your own savings. That's why your total interest is only $4,893 on a 12% loan.

Essentially you are foregoing any earnings on your savings to make it appear that you only need to earn 8-10% to pay off a 12% loan, but in reality the portion of the loan matched against your stock portfolio loses money unless the stock portfolio returns significantly outpace the 12% you are paying (due to taxes).

Look at it in three components. You are going to save $29,893 over the next three years )$830 per month). You are going to have a $25k portfolio that you can keep the gains on. You are going to pay your lenders $29,893 over the next three years. If your portfolio grows to $33,704.14 (10% gains), you'll owe around $1,700 in taxes (assuming 15% cap gains + 5% state taxes), netting around $32,000 total.

If instead, you had just put your savings in a money market yielding 4% after tax, you'd end up with around $31,700 total. Only $300 less for absolutely no risk and no effort.

If you invest your savings in an index fund that simply produces 6% after tax returns you'd end up with $32,605, $600 more without taking any leverage risk. And if you can really earn 10% per year by investing in your chosen stocks, just investing your savings would end up with $34,500, almost $800 more than using leverage.

The reason is that while only relying savings starts slower, it's counterbalanced by the fact starting at $25,000 isn't good if it's using negative leverage that lowers your returns. You must return 20% more than your loan rate in order to have positive leverage, 15% per year for a 12% loan rate.

This problem is made worse because your interest isn't deductible against investment earnings. If you use margin interest, your break-even can be the same as your interest rate, which should be 9% or less for a margin loan.

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Even if my stocks stay stagnent, at a 0% return, I will have $25k in 3 years. If I don't take this loan, I cannot guarantee I will save $25k over the next 3 years. Does that change your mind at all?

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Earning nothing is a substantial opportunity loss ($6,500)for you compared to just forced savings to a money market. Why haven't you thought of an automated savings, i.e. just schedule a monthly transfer to vanguard or your money market?

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I agree, but it's not like I'm buying penny stocks here. I am buying large-caps, worst case scenario i figure i lose 20%.

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From Oct. 2000 to Oct. 2002 (two years) the S&P 500 (all blue chip large caps) lost 40%. Of course that doesn't count dividends, so it probably only really lost 36% or so.

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Although I know I am being extremelty optimistic, I am positive i can get at 20-30% annual return on my money by investing in individual stocks. Before you jump all over me, Warren Buffet says he could definitely get a 50% return on smaller portfolios.

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Warren Buffett has told his shareholders not to expect him to beat the S&p 500 by more than a couple of a percentage points from now on, and to expect only 6-8% from big stocks, so 10% for ol' Warren. The reason? His portfolio is so large he can only buy "blue chip" large cap stocks, which are the most efficiently priced and expensive stocks.

He only said he could guarantee 50% returns if he was only running a $1M portfolio, so he could invest in small cap and micro-cap stocks, where there are much greater opportunities (and risks). I've beaten the market myself for over five years running by substantial margins, but I could never do it if I was investing in blue chip stocks.

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I feel I am the T.J. Cloutier of the stock market. I don't do much math but i have an absolutely great feel as to what companies are going to be successful and which one aren't. I'm also still young so I know what trends are hot and which ones aren't (i.e. I can read through the hype on journalists trying to act cool).

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And this isn't how Buffett picks stocks. Not by "feel", not based on trends that are hot (he ignored internet stocks, for example). You understand so little about investing I'd have to handicap you as extremely -EV in expectation. Investing is hard work, and requires research and good judgment. Would you expect to be a great poker player without studying and applying yourself?

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I definitely agree this loan is "thinking outside the box" and would traditioanly be frowned upon. But please provide me with some calculations on how much I would actually be losing out on. I don't think it would be more than 2-3k over 3 years maximum on average. And that is worst case scenario.

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One valid worst case scenario is that your $25K turns to $15k. That's the 40% loss that 500(!) stocks averaged in only two years. Since you are picking 5 specific stocks you have a volatility risk that is much higher than that, so your real worst case scenario is much worse. Example, there were many internet stocks that lost over 95% in two years, and some suck, er, investors loaded their entire portfolios into 5 hot internet stocks.

But even if 40% is your worst case, you've turned $30k in savings into $15k, whereas a risk free investment strategy would have turned it into $32k, an opportunity loss of $17k (almost two years of savings gone).

One of the biggest problems that causes individual investors to trail the markets is they buy things after they have gone up, and sell things after they have gone down. They panic when the markets are down and pull their cash out and miss the rebound. They get afraid they'll be missing out on the party when the market hits new highs and they put everything in at the top, including borrowed money.

You seem to have a lot of those characteristics. You have no real experience investing, but tremendous confidence. The markets are setting new highs, so you want to get in now, without waiting because you seem to be afraid of missing out. I question what will happen to your 5 picks when they are down 20% and going lower every day. Someone like yourself, who has no experience to rely on, is likely to lose that extreme confidence and panic faster, locking in your losses before the market turns.

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so does that mean my investment in nintendo (NTDOY) blows?

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It's interesting you've made nintendo an investment right now when it's getting tons of great press. Don't you think all those high expectations for the Wii are "baked into" the stock's price? I question whether you really would have invested a year ago. It's easy to say you would, but when you have real money at risk sometimes it's hard to pull the trigger, esp. if the rest of the world is saying nintendo sucks and PSP3/XBox are going to kill the Wii.

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I agree, dollar-cost-averaging is great, but that is only because the market goes up over time. If you invested in a lump sum at the beginning of your investing period, you would end up with more money, on average, than your dollar-cost-averaging method (For example: Investing 12k as a lump sum every January is better long-term than investing 1k every month).

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Dollar cost averaging protects you from buying in at the top of a market. Something you just don't seem to fathom as possible. Anyone who dollar cost averaged at the last market peak (1999) is way ahead of anyone who bought in with a lump sum at the same time. The lump sum guys will never catch up.

Edit: I should point out I did my estimates by hand in excel, so I might be off slightly. But I'm pretty sure any minor inaccuracies don't change the thrust of my comments.

[vilemerchant]

I know this seems to be my answer to everything, but you'd be far better off funding this money thru credit card abritrage. Pull your 25K out of credit cards using convenience checks and go and buy your stocks, but before that sign up for a heap of new cards that give 0% balance transfer rates. Immediately transfer balances and you've got the money interest free. Whenever a 0% promo rate is about to run out go and get a new 0% CC and transfer again.

Step 2 = Profit!

[Shoe]

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Shoe, I know I disparaged your plan, but I understand that you are going to do it anyway, and I don't think you will be dissuaded in any case.

I am really curious about one of my questions though. At its most basic level there are two questions that a stock picker needs to ask. First, does this company have strong future prospects? Second, is the security priced attractively in light of those prospects? I understand why you think you can tackle questions one, although I disagree. I have no idea what methodology you will be using to answer the second question though. How do you determine if a stock is over or under priced?

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Good question. I don't have a good answer for #2. That is an area I am working on and definitely need to study more.

[sillyarms]

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You have to get 8-10% returns on the market (historical averages that most investors don't even get)

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I agree with most of what you are saying, but if 8-10% is the average isn't this what most investors should end up with? It's like saying your ev is $8 but most of the time you will end up with $5.

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It's because people don't invest in boring indexes. They'd rather buy individual stocks and lose money or make less than the market.

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This doesn't make any sense to me either. Shouldn't a random individual stock make the same amount as the ev of the market in the long run? Why is your ev less because you are buying an individual stock? If the stock is more risky shouldn't it have a higher average return?