Today I’m going to let you in on an investing secret.
And it’s a big one – a huge one, actually.
It’s a secret that I use in my own work – in fact, it serves as the framework for everything that I do. And if you embrace it – as I have – you’ll find that this secret will pave the way to life-changing wealth.
In our talk here today, I’m going to tell you all about this secret. I’m going to explain what it is – and how to use it.
The goal, of course, is to bring to you a stock that will let you put this secret to work – immediately…
A Welcome Disruption
We’re all familiar with the term “Disruptive Technology.”
It’s a powerful concept.
At least, as far as it goes.
You see, so-called “Disruptors” aren’t limited to the tech sector.
These catalysts and Agents for Change affect everything we do.
Disruptors are already changing how we communicate (smartphones), how we date (Match.com, eHarmony), how we mate (Viagra and Tinder… or so I’ve heard), what we eat (genetically modified and so-called “super foods”), how we work (Monster.com, Jobr), how we get heat, cooling and light (fracking), how we get around (Uber and Tesla), how we get where we’re going (GPS) – and where we stay once we get there (Airbnb).
What investors need to realize is that, hidden behind each of these changes, is a major opportunity to make money.
Take lending, where Disruptors are completely changing the business – right now.
I’ve been following this business very closely for just this reason: If you understand how the business is being disrupted, you have a very good shot at extreme profits.
In fact, by identifying the specific Disruptors, you can make money on both the lenders and borrowers – as well as on the new players that are quickly taking the field here.
Here are the Disruptors, here’s what’s changing – and here’s how we’ll cash in.
The lending business used to be a simple one – so simple, in fact, that it was said to be governed by the “3-6-3 Rule.”
During the four decades that spanned the 1950s through the 1980s, the lending industry was viewed as being so stable that bankers could take in deposits at 3%, lend the money out at 6% – and be out on the golf course by 3 p.m.
More recently, small borrowers – meaning individuals, families and small businesses – mostly relied on banks, credit unions, finance companies and credit cards to pay for things or obtain cash.
All those lenders have “fixed costs,” like brick-and-mortar offices and paid staffers. Traditional banks needed those physical locations and workers to accept loan applications, check credit scores, verify employment and income, underwrite and service loans and run the marketing, advertising, regulatory and compliance operations that kept the bank alive.
After all, it costs money to source deposits and to borrow in the capital markets.
And on top of those fixed costs, lenders have to eat losses when borrowers default.
Lenders typically charge high interest rates to cover their fixed costs and as compensation for the risks they had to take.
But because there were so few choices, borrowers had to pay whatever rates the lenders sought.
That’s how it’s been for years for both lenders and borrowers.
Then along came the Disruptors.
Profiting From Our Peers
Today’s borrowers can go online, answer as few as seven questions – and have their loan approved in a matter of minutes. And I’m talking about a full approval, meaning most borrowers know how much money they’re getting, the interest rate they have to pay and how long they have to pay the loan back.
Lending has been changed forever.
Thanks to the new market Disruptors.
Those new players figured out that the fixed costs and loss expectations added an average of 425 “basis points” (4.25 percentage points) to the interest rates borrowers had to pay on small loans.
What these new market challengers realized is that – if they could cut fixed costs and do a better job assessing risk and managing loan losses – they could make the loans easier to get, slash the costs for borrowers and grab market share. The upshot: They could make fat profits for themselves, for the investors who lend on their platforms and for their financial backers.
Of course, technology and data make this latest Disruptor possible.
And a new market entrant – known as peer-to-peer (P2P) – illustrates how the lending business has changed. Indeed, this P2P lending model shows us how the new Disruptors operate.
The premise of P2P lending is pretty simple: Individuals lend to individuals. Borrowers are matched with lenders based on who wants to borrow how much for how long – and who’s willing to meet those needs based on the prospective borrowers’ credit scores and measures of creditworthiness.
To give you a better picture of this, let’s take a look at some intriguing examples…
A Borrower… or a Lender Be
Prosper is an example of a P2P lending site. Lenders can partially fund a loan request – with as little as $25 in some cases – or lend the full amount of a borrower’s request based on how much the borrower wants, what they want it for, what interest rate they will pay and their creditworthiness.
(If you want to take a look and see what this looks like, check out the loan requests being fulfilled on the site’s “Browse Listings.”)
LendingClub Corp. (NYSE: LC), a publicly traded online lending company that offers personal loans up to $35,000, started out as a P2P lender. But it isn’t a P2P player anymore.
While there are variations in how borrowers are profiled at different lending sites, the real difference in business models comes down to how loan requests are funded.
Credit scores, checks on creditworthiness and traditional borrower profiling techniques are used by almost all the lending businesses. But Big Data analytics and proprietary “algorithms” are increasingly giving lending-market Disruptors a massive edge over all their competitors.
An example of how aggregating data and parsing it gives lenders a comfort level with borrowers is plain to see over at Kabbage, which claims to be the “No. 1 Online Provider of Small Business Loans.”
Lenders who fund Kabbage customers’ business loan requests for as much as $100,000 – sometimes in only a matter of minutes – use data about the borrowing business pulled from places like eBay Inc. (Nasdaq: EBAY), Amazon.com Inc. (Nasdaq: AMZN), PayPal, Intuit QuickBooks and even business checking accounts to assess the prospective business borrower’s revenue, cash flow and profits.
To aid this bit of “borrower profiling,” algorithms sift through billions of bytes of Big Data to assess a borrower’s spending habits, payment routines, banking patterns and ability to repay the loan.
That’s important to lenders. Without lenders ready and willing to fund loan requests based on risk measures they understand, this new lending paradigm wouldn’t exist.
But because Big Data analytics, predictive algorithms and online efficiencies make the new lending landscape flatter and more “transparent” than it’s ever been, lending Disruptors are lining up to fund loans.
That’s why the P2P lending model is already almost completely outdated.
And we already know what’s coming next.
Banks, private-equity (PE) companies, hedge funds, insurance companies, high-net-worth individuals and institutional investors are all lining up to lend into the new models.
Loans to individuals, families and small businesses typically carry above-market interest rates, which is what attracts all these professional money managers.
In fact, some lenders have already co-located their servers next to – or as close as possible to – the servers of lending sites. So when loan requests come into the lending sites, the computers of “High-Frequency Lenders” can grab all the pertinent data they need of a borrower before other potential lenders hoping to fund high-interest loans to qualified borrowers, and fulfill the loan request as fast as possible.
Of course, there’s more to institutional investors just wanting to lend to small investors shunning banks and traditional financing channels – many of them are owned or managed by the same lenders chasing the “new Disruptors.” Small loans can be packaged, securitized, sold, traded and invested in, just like mortgage-backed securities (MBS), leveraged loans and high-yield loans.
Think about that: When the “securitization” market was created – meaning individual mortgages could be packaged up and sold – the money originators collected from selling their loans kept coming back to them so they could make more and more mortgage loans.
All that money doubling back through mortgage lenders increased competition and helped ratchet down mortgage rates.
The same thing is going to happen to small-loan lending.
There will be winners and losers in this new lending paradigm – as is always the case when the “New Disruptors” do their thing.
In fact, there’s already a new twist in the new lending game. And there’s a way to play it.
And we’re going to drill into the specifics in our next report, when I tell you about the “new, new lending model” – and show you exactly how to invest in it… and its offspring.
See you then.
P.S. I encourage you all to “like” and “follow” me on Facebook and Twitter. Once you’re there, we’ll work together to uncover Wall Street’s latest debaucheries – and then we’ll bank some sky-high profits.