[This is a guest post by Constantin Gabor]
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Even though some people see domaining as a highly speculative business, I hope we can agree that if you play it the right way, it’s not speculative at all.
So how can we apply the investments principles of Warren Buffet (the greatest investor of all times) to domain names?
1. The 20 holes punchcard.
Imagine that within your lifetime, you’re allowed to buy only 20 domain names. That would make you think twice before grabbing that dot net just because it dropped.
Think of it this way: you’re a domainer buying and selling premium domains. If you limit yourself to only 20 domains during your life then you have a higher chance of owning truly premium assets.
You don’t want to manage thousands of less valuable domains just because you could afford to buy them.
If you are limited to a certain number of domains you can invest in, the quality of your decisions will – hopefully – also go up. Create that constraint-environment artificially (in your mind) and focus on the good stuff.
This also leaves you more time to develop some of those domains into quality websites that you can be proud of. You can make more money with a developed site, thus transform your domains into a business.
2. Don’t bet. Don’t take risks. Buy only undervalued domains.
Warren Buffet never bets on stocks. He simply buys good, solid businesses that are undervalued.
This creates a margin of safety that makes a forecast of the future unnecessary. The lower the price paid for a stock, the wider the margin. You get an increased safety of your invested capital while the potential return of that capital increases.
If Buffet was interested in flipping that stock (however unlikely), he knows that he can get more than what he paid for it. In addition, he knows the stock produces a certain amount of profit that cannot go down because the company has a competitive advantage in the industry – or moats, as Buffet calls them.
The same logic follows for domains. If you want to be covered at all times, only buy undervalued domains, which are more valuable that what you paid for them. This way you know you can flip them and make a profit. Basically, you need to see who’s selling dollars for pennies and only then it is it safe to buy.
You can never know if the price you’re paying is a historic low, but if you research, you can figure out the value of the domain. To do that take into account the following:
- The exact match monthly number of searches in Google for that term
- The cost per click
- The average purchase value in that particular industry
- The average profit margins (for affiliates and for end-use players)
- The buyer’s urgency/need (e.g., “air conditioning repair” is more urgent than “air conditioning”)
A four letter brandable domain is a risky bet. Better get that two words dot com, in a good industry, that actually means something. If those two words define a sought after product that people pay money for, your risk is low to nonexistent. Pursue that.
Chances are you’re not a corporation so there is no need for you to pay the end user price for a valuable domain just because you can. If you really want to have it, try to pay less for it and offer equity for the difference.
There is a famous quote about entrepreneurs: “They don’t want to pay with cash but they’ll give you chips.” Chips as in casino chips. So take the risk down by inviting the seller to take some of your chips – the chips can be your knowledge, your business contacts, shares in other businesses you own, etc.
3. There is one thing better than money. Don’t sell that thing.
No matter how much we all want a many-million dollar exit, there’s something better than money. Can you guess what that is?
It’s simple: a money making machine. You want continuous money not just one-time money.
If you have some cash available for domain investing you have to ask yourself this: How can I buy revenue with the money I have now? That’s what investing is: buying future revenue.
Sometimes you see successful people being interviewed and they speak about owning this and that, making X millions a year from this and X billions a year from that. You say to yourself: These guys aren’t smarter than me but it seems that they were really smart once or twice in their lives and that paid off. How can I do that?
Look for ownership opportunities – not just flipping. When you flip, you’re constantly on the lookout for buyers, always hustling, always looking for bargains, always thinking you might be missing out.
In other words, you must assess:
- What’s the best moneymaking machine you can buy with your current available funds?
- What’s your competitive advantage in that niche? Are you knowledgeable? Are you passionate about the industry?
- Are you willing to be in it for the long haul? Or, as Warren Buffet says – hold on to that stock forever.
You can make more money by owning a space and creating value within that industry as opposed to pure buy-and-sell speculation. You’re not buying just a domain. You’re buying a money-printing press (consider this another term for business).
If you combine the long-term approach with the other two principles (being ultra-selective and buying a domain for less than it’s worth) you’re more likely to win the business lottery by owning a successful online business on a premium domain.
4. Stay within your circle of competence.
The bonus fourth principle: Warren Buffet only buys stocks he understands. Why would you do anything different with your domain investing?
Spreading yourself too thin across too many industries will only give you headaches. Be the master of a few instead.
If you know the buyers, the sellers, the most common business models, the proven tricks and shortcuts, etc. – you’ll be an industry rock star. Don’t trade that for a premium domain in an industry where you have no expertise.
If you do own domains outside your circle of competence, partner with the right people and let them run the show. Do joint ventures like Rick Schwartz. Or, as Marc Ostrofsky says: Know what you don’t know.
But develop – and play big on – what you know.
Over to you
- Are you a fan of Warren Buffet?
- What are your principles when buying domains?
- Do you like to invest in/develop domains or just buy and sell? Why?
Let’s chat. Drop a comment.
About the Author
Constantin Gabor is an amateur filmmaker and online marketer from Europe. You can find him on VideoEditingSoftware.com.
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