Why I'm Getting Out of P2P Lending

I had already stopped investing in P2P lending to SMEs (Small to Medium-Size Enterprises) over a year ago. Simply, the return did not outweigh the risk. Unlike bank deposits there is no protection when you invest your money in P2P lending. In shares and their derivatives the return can be quite considerable even though there is a chance you'll lose it all. The percentage return on P2P lending to small businesses is often in single figures, again with the risk of losing it all.

Many businesses borrow from P2P lenders as a last resort, having been turned down by banks as being too high risk. For me to then bailout such a business with a loan with a single digit return made no sense. By the time I began to wind down my investment in SME loans the failure rate was increasing. I got out with a profit and in the nick of time.

Now, I am winding down my loans to individuals. Again, the rates are being squeezed. Not only that but one P2P investment site that I liked to use is constraining the way I can set my own interest rate such that my loans now receive less than 5% return when they used to receive over 6%. All this means the return no longer reflects the risk.

Many P2P lending sites want to become banks. This is good in that lenders will be protected by the FSCS compensation scheme but the returns will be no better than the established banks. Why then bother with the rigmarole of P2P lending when you can leave your money in a High Street bank?

In the future I might return to P2P lending but at the moment P2P is going through a transition period and I don't want to risk my wealth whilst the market adjusts. If a P2P 'bank' gets FSCS accreditation and offers a higher return than a High Street bank then I'll be back. Until then I shall protect my capital by taking my capital out of P2P and parking it elsewhere for a few months.

How Science is Taking the Luck out of Gambling

Author of The Perfect Bet, Adam Kucharski traces the scientific origins of the world's best gambling strategies during a Royal Institution lecture.

Amazon - The Perfect Bet

A Man for All Markets

A rare post from me these days but one that I have been looking forward to writing. A Man for All Markets is written by Edward O Thorp, a name that most smart traders will know. Written by the man himself, the book covers the entire life of this successful academic, "gambler" and financier. Obviously, I put the word gambler in quotes because Ed Thorp is anything but a gambler. 

Using John Kelly's work on optimal wealth growth, Thorp created profitable strategies for both roulette, blackjack and baccarat before moving into the financial markets, where he  discovered the Black-Scholes pricing formula before Black and Scholes themselves had proven Thorp's findings.

The first few chapters of the book cover the early life of Thorp, a childhood that would be the envy of any inquisitive child. In a world that now smothers children in cotton wool, there is much to be said for allowing a child to run riot so long as they learn but do not harm others. And run riot Thorp did, becoming an autodidactic chemistry and physics student at an under-performing school that never expected much from him.

To say that Thorp was a precocious and confident child is an understatement. Thorp's talent in the sciences earned him a scholarship to university by way of scholastic science competitions. Naturally, Thorp taught himself the required knowledge with a little help from his teachers. Without the scholarship we might never have heard of Edward O Thorp. 

During his early academic life Thorp developed card counting and an optimal staking strategy using Kelly Criterion. Foremost in Thorp's mind was wanting to be the first to publish his work in an academic journal rather than to profit. To that end Thorp met up with Claude Shannon (father of information theory) to help get his paper published.

Shannon also had an interest in experimentation and was very interested when Thorp mentioned an interest in predicting outcomes on a roulette wheel. The two academics developed one of the first handheld computing devices to beat the game but the device was used only once to prove the concept. Later, the work would be replicated in the 1970s by Eudaemonic Enterprises, a team of graduates before they too returned to academia and forayed into the financial markets. See Gambling Connections

Thorp then turned his attention towards the finance, the world's biggest casino with unlimited bet sizes. Discovering how to accurately price options before Black and Scholes, Thorp learned how to hedge a stock against its derivate for profit. Thorp set up one of the first quantitative hedge funds and made millions for his clients.

This book is certainly not a "get rich quick" book. Nor is the book an advertising pamphlet posing as a book, only to point at a website with no-money-back get rich quick gambling strategies. Simply, the book is about a boy's desire to understand the world he lived in. Thorp self-taught himself the sciences and progressed to be a professor of mathematics and conqueror of the markets.

Throughout the book you will see that Thorp is always concerned with edge, reducing risk and never betting until he knows the odds are firmly in his favour. How many do we see announcing they are going to have a go at sports trading to teach themselves how to trade in the financial markets and all with no knowledge of edge or risk?

Unlike others Thorp is mindful of never working so much that he neglects his family and friends. Today he lives a more sedate life but one which is still more productive than most. An important anecdote in the book reads...

Joseph Heller and Kurt Vonnegut were at a party given by a billionaire when Vonnegut asked Heller how it felt to know that their host might have made more money in one day than Heller's Catch-22 since it was written. Heller said he had something the rich man could never have. When a puzzled Vonnegut asked what that could be, Heller answered, "The knowledge that I've got enough."

And that's what life in general (including trading) is all about. Those who just can't stop and will risk everything for a little more will never be fulfilled. Those getting into trading because they want more but don't know how will only become more unfilled and maybe worse.

Thorp's book resonated slightly with my life; self-taught because I could never sit and listen to a dreary teacher. I got into university through the backdoor as a "mature student". Interested in sports betting markets, my research was picked up by a company creating financial trading software and where I worked for five years. No millions in the bank but I am more than content. Enough was just enough.

Amazon -  A Man for All Markets

Relieving the Stress of Trading

In answer to my previous article, The Search for Edge, Boris (probably not Johnson) left a comment that I felt would be best answered in a dedicated article rather than as a reply in the comments section of the original article.

Last week's article saw me state facetiously that I was loath to publish details of my trading lifestyle, "Primarily because it is so dreary. No poolside selfies from me, courtesy of a cheap AirBnB holiday."

Boris commented

James you have never been keen on showing the poolside life of trading, I understand why. But wouldn't it be better to say it's a highly important part because of how stressful trading is? - or any high level competition and learning to turn it off and turn it on is one of the most important parts of high level competition (Trading & Business). Which is why business and trading is the two more difficult domains to achieve substantial success in is becuase it run's 365 and your neck is on the line everyday. My point being as long as people understand intermittently busting your ass then having a week of in capetown once a quarter will do you much better in the long run then just solid grind in which you become more likely to make errors and costly mistakes. Rest is key whichever way you get it.

I didn't know there was a poolside life to trading. Did I miss a clause in my agreement with Betfair?

Betfair User Agreement

15.2 - All users of the Betfair exchange are expected to post nauseating photographs of their chest hair from different poolside locations on a regular basis or forfit their exchange rights and privileges.

That'll teach me to scroll immediately to the bottom of those tiresome service agreements and click "I Agree" without reading anything.

Boris says, "But wouldn't it be better to say [poolside life is] a highly important part because of how stressful trading is?"

Why? Is chlorine invigorating for you? Personally, my ears clog up when I'm in a pool and I become very grumpy for the rest of the day so no, being poolside, toasting my chest hair (singular) would not be a good idea. A grumpy bunny does not a trader make.

Reading Boris's comment in its entirety suggests that he is talking about himself, a manual trader, who sits in front of a screen all day long. If I did that then I would not be looking for a pool, I'd be looking for an optician and maybe a psychoanalyst.

If Boris (and others) took the time to read more of this website then he (and they) would realise that I am an algo-trader, one who doesn't sit in front of a screen all day long.

Maybe it is not fully understood what algo-trading is. Yes, there is research and programming to be done in front of a screen but that is varied and enjoyable work and not the chore that the ladder lovers have to endure.

When a manual trader has constructed (or guessed) a strategy they have to implement it by hand in front of a screen from entry to exit. An algo-trader codes the logic of a strategy into a bot (i.e. entry, exit and any money management strategy) and then leaves the bot to get on with it. Therefore, the algo-trader has a lot more free time and suffers a lot less stress (if any) because they are not physically trading.

Boris is rather behind the times if he believes that manual trading is still the mainstay of the financial markets. Most open outcry trading pits have gone. Some of the jobbers have swapped their brightly coloured jackets for a shirt and tie, and sit at electronic terminals but the bulk of financial trading is automatically performed by computers. Yes, the markets are running, somewhere on this planet, 365 but news and data are being processed and acted upon at the speed of light and that's no place for a human.

If you want to relieve the stress of trading then don't trade. Build a trading strategy and leave it to an automated trading system to implement. If you truly have an edge then why are you allowing your human frailties to get in the way of your potential profit? If you have to constantly jump in and take control then your system is not quantifiable and there is no proof of edge.

There are those who claim to have a sixth sense when it comes to manual trading. Some call it a gut feeling and use poor research (since when did high-frequency trading involve manual trading?) in an act of confirmation bias to prove they can do it. However, if you can quantify your trading then your strategy can run as an algorithm in a trading bot. Otherwise, there is no strategy and it is all guess work. There are no excuses for not wanting to automate your trading and benefiting from the scaling up of your income that automation will provide.

Back to Boris's poolside angst. I have no problem with people taking holidays. What I have a problem with is people using exotic holiday imagery as a marketing exercise to sell an unattainable lifestyle to the many. After all, if a trader is that good and earning plenty of money then why doesn't that trader set up an office in his favourite sunny clime and use a VPN for trading or better still, run an algo-bot from a server, rather than living in a shabby rental in dreary England?

The Search for Edge

I thought I would take another look at the search keywords that have brought people to this website. Sometimes, the keywords remind me of an old article that I reread and decide it needs to be reworked so as to get the point over more succinctly. Other keywords alert me to the need to add new articles. Let's have a look at some of the search keywords that brought people to this website.

My previous article titled Gaming Betfair? was ingeniously linked to by the Google search engine with the keywords "hoovering betfair". I guess gaming and hoovering can be regarded as synonymous in this context. However, hoovering suggests a certain ease to picking up pennies in front of a steamroller. Trader247's website demonstrates that hoovering up pennies is possible but not easy.

There are no simple 'rinse and repeat' strategies that you can apply to Betfair and guarantee a steady income stream. Although many of my strategies have been based on a theme, none of the strategies last intact for anywhere close to a year, requiring scrappage or reoptimising and other less subtle changes.

"Betfair secrets the pros use" is a common search phrase I see on my website's statistics page. I am sorry that the website does not provide them in the fashion the person using that phrase was expecting. I assume he spent less than a minute on this website and was soon looking at another, more forthcoming but, perhaps, less realistic website.

Secrets are secrets. An edge shared is still an edge halved. If I give or sell you a secret then it's no longer a secret. As my About page says, publicly I am only in the business of releasing a lifetime's worth of research for beginners and experts alike to do with as they please. Any edge is kept for my own use or for those making use of the consultancy side of my work.

The search phrase "day in the life of a sports trader" is also the title of an article I have sitting on my hard drive in draft form but I have yet to publish it. Primarily because it is so dreary. No poolside selfies from me, courtesy of a cheap AirBnB holiday.

Instead, my life consists of programming tools to manipulate, visualise, and back-test data. If I get out then it is (was after leaving the London area) to meet shabby looking, caffeine addicts running syndicates. Otherwise, I was on Skype, talking to people in the Far East discussing latency issues with their setup between Europe and elsewhere. Once, I got to visit the Football Pools office in Liverpool whilst consulting but enough of the glamorous side of my work, people might get jealous and want to emulate me.