P2P Lending : A warning from The Richest Man in Babylon

financial independence

The Escape Artist says…

Today’s post is from Arkad, who achieved financial independence over 6,000 years ago in the ancient city of Babylon.

Arkad learned the ancient laws of money and, as a result, became The Richest Man in Babylon, the subject of the classic personal finance book of the same name.

Now you may be wondering what relevance this might have today?

But I recently read the book and it turns out that money is still governed today by the same underlying principles which applied when prosperous men and women thronged the streets of Babylon, six thousand years ago.

It’s fascinating to spot applications of the book’s wisdom in today’s world. Let’s take an example of a modern trend in finance that’s a lot older than it might look at first glance. Peer to peer (P2P) lending is where people lend money direct to borrowers (rather than putting it in a bank, which then lends it on to other borrowers).

In recent years, following the credit crisis of 2008/09, peer to peer (P2P) lending has become popular as tightened lending criteria at the banks have forced higher risk borrowers to look elsewhere for credit.  At the same time, low interest rates have encouraged investors to reach for yield.

turkeySo low grade borrowers meet amateur lenders…what could possibly go wrong??   

Investors reaching for yield like this remind me of turkeys happily gobbling up the food from that nice farmer in the run up to Christmas.

Peer to peer lending is actually nothing new. Before banks were invented in Florence in the fourteenth century, all lending was direct between the moneylender and the borrower.

So who better to discuss the issues around P2P lending than Arkad, an experienced investor and money lender who lived through several credit cycles. Arkad has a slightly “old world” writing style that should not put off the modern reader because the content is timeless.

The Escape Artist

Arkad

Arkad says:

 

 

 

 

 

 

 

 

Guard thy treasures from loss

“Misfortune loves a shining mark. Gold in a man’s purse must be guarded with firmness, else it be lost. Thus it is wise that we must first secure small amounts and learn to protect them before the Gods entrust us with larger.

Every owner of gold is tempted by opportunities whereby it would seem that he could make large sums by its investment in most plausible projects.  Often friends and relatives are eagerly entering such investment and urge him to follow.

The first sound principle of investment is security for thy principal.  Is it wise to be intrigued by larger earnings when thy principal may be lost? I say not.  The penalty of risk is probable loss. Study carefully, before parting with thy treasure, each assurance that it may be safely reclaimed. Be not misled by thy own romantic desires to make wealth rapidly.

Before thou loan it to any man assure thyself of his ability to repay and his reputation for doing so, that thou mayest not unwittingly be making him a present of thy hard earned treasure.

Before thou entrust it as an investment in any field acquaint thyself with the dangers which may beset it.

My own first investment was a tragedy to me at the time. The guarded savings of a year I did entrust to a brickmaker, named Azmur, who was traveling over the far seas and in Tyre agreed to buy for me the rare jewels of the Phoenicians. Those we would sell upon his return and divide the profits. The Phoenicians were scoundrels and sold him bits of glass. My treasure was lost. Today, my training would show to me at once the folly of entrusting a brickmaker to buy jewels.

Therefore I do advise thee from the wisdom of my experiences: be not too confident of thy own wisdom in entrusting thy treasures to the possible pitfalls of investments. Better by far to consult the wisdom of those experienced in handling money for profit. Such advice is freely given for the asking and may readily possess a value equal in gold to the sum thou considerest investing. In truth, such is its actual value if it save thee from loss.

This, then, is the fourth cure for a lean purse, and of great importance if it prevent thy purse from being emptied once it has become well filled.

Guard thy treasure from loss by investing only where thy principal is safe, where it may be reclaimed if desirable, and where thou will not fail to collect a fair rental. Consult with wise men. Secure the advice of those experienced in the profitable handling of gold. Let their wisdom protect thy treasure from unsafe investment.”

I recommend the book The Richest Man in Babylon to readers.  It is stuffed full of timeless wisdom. The quote above was taken from the chapter Seven Cures for a Lean Purse. If you want to know the other cures, read the book!

 

 

 

2 comments

  1. jfrsmith · · Reply

    Interesting ideas that haven’t dated! However choosing who you lend to via P2P sites strikes me as almost as futile as active investing, if you don’t have the knowledge *or* the risk appetite then why would you bother?

    From the (admittedly little) research I’ve done into the more popular P2P lenders they seem to advocate an approach that has more similarity to passive investing: Invest in drips and diversify across many businesses using an automated approach based on your chosen risk.

    I agree that there’s inherently more risk in any P2P lending system, but is this post aimed at investing in P2P lenders as a whole, or at investing in particular businesses through a P2P lender?

    First comment, btw. Been powering through your back catalog lately, great stuff 🙂 keep up the good work!

    1. Thanks for the comment.

      I think I’m in the same camp as you when it comes to P2P Lending. For me, the potential rewards are not worth the (hidden) risk nor the hassle involved in choosing / researching / analysing it. I want the fixed income element of my portfolio to be safe as possible to act a “shock absorber”.

      Reaching for yield is usually a mugs game and my personal position is not to bother playing a game where the odds may be stacked against me.

      But I know that others take a different view re P2P lending and that’s fine. All I’d say is read Fooled by Randomness and think about the risks.

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