LendingClub and the Reach for Yield

Tyler Linsten Investing


T.A.N.S.T.A.A.F.L.: there ain’t no such thing as a free lunch. This is one of the first things everyone learns in Economics 101 but clearly some forget it. If something seems too good to be true, it probably is, especially when it comes to investing.


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A steady march lower, but notice the red font: down 26.97% today.


Today, LendingClub is making headlines because its founder and CEO has resigned after numerous unsettling revelations were disclosed. LendingClub is a “peer to peer” financial services company – individual borrowers and individual investors are paired together, in a sort-of online matchmaking service for lending. Their (now-dubious) claim to fame is that both borrowers and investors benefit versus traditional banking services because of LendingClub. A juicy tidbit from the WSJ story:

LendingClub said the board review found the San Francisco company sold an investor $22 million in loans whose characteristics violated the investor’s “express instructions.” The board found that some people at the company knew the loans didn’t meet the investor’s criteria and that the application date on $3 million of those loans had been altered to make them comply.

I believe there is an “F” word given to that type of behavior. That’s not going to sit well with the powers that be. You know, the ones who tend to conduct “perp’ walks.”

Here’s the important takeaway: Everyone wants higher yield on their investments, but it’s not as easy as downloading an app or snagging the highest-yielding ETF. Reward comes with risk and there is no free lunch. Remember those high-yielding MLP funds that were all the rage?


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Buy for yield, and yield only, you’ll find the rug ripped from beneath you before you know it.


If I was a LendingClub “lender” I’d be very nervous right now. Just another reminder that when it comes to investing for yield: buyer beware.