Why Warren Buffet Recommends You Invest In Domain Names (and How to Apply His Investment Style to Domaining)

(OK, first off, Mr. Buffet didn’t recommend you invest in domain names. But I think if he spent time researching the domaining business, he would recommend you invest in domain names. Read on.)

This post at Domain Name News reinforced a lot of my ideas about domain name investing. The article makes a lot of parallels between stocks and domain names, what would be a “growth vs. value” play, sale multiples, etc. Great primer, go read it if you haven’t yet.

I would like to take the parallel a bit further though. There are good stocks and bad stocks; there are short term plays and long term plays. In my opinion, premium generic domain names are superb businesses that will deliver superior returns over the long term. What do I mean by the term ’superb business’? Think of the type of business Warren Buffet would buy (Coca-Cola, Gillette), and compare that, to say, a random premium generic domain name: SavingsAccount.com (I have no idea what’s there or who owns it, it just popped to my mind as an example of a premium generic).

  • Excellent brand equity: Mr. Buffet understands that a brand name built up over many years has an intrinsic value that will drive sales for years to come. (People know Coca-Cola because of 50 years of advertising. People will buy Coca-Cola for another 50 years.) Now, SavingsAccount.com hasn’t spent billions of dollars on branding BUT the .com extension itself has been branded by thousands of other people, media channels, and companies–and that branding is built in to SavingsAccount.com regardless of whether the owner spends a dime on advertising. Intrinsic, strong branding? Yummy.
  • High profit margins: Mr. Buffet invests in companies that generate a lot of cash, rather than companies with unrealized “potential”. A parked premium generic domain name is going to have negligible expenses (yearly registration), and if it’s truly premium, will yield revenue from type-in traffic which dwarfs that expense. If your yearly registration expense is $6.95 and CPC revenues for the year total $700, that’s a 99% profit margin. Pretty sick. :-) Now, if you’re paying for the domain on the retail end (after 4-5 domain wholesalers have bought/sold it), you probably have a lot of money tied up into that asset. But that’s a one time capitalization (which can probably be depreciated), and the cash flow is recurring. Morover, if you’re on the retail end, you’re probably developing the domain name–and in that case, affiliate sites, e-commerce outfits or arbitrage plays will likely yield high margins as well.
  • A competitive “moat” which protects the business: Mr. Buffet likes to find businesses that are not only profitable, but which have a “moat” around this profitability. (Otherwise, he wouldn’t feel comfortable holding onto the business for 10 years as industry conditions change.) For instance, take Coca-Cola: the worldwide distribution network they’ve built would probably take decades, not years, to profitably replicate. Also, consider this scenario: RC Cola tweaks their recipe so that a majority of consumers prefer its taste to that of Coke. Do you think that scenario would cripple Coca-Cola? I’d be surprised if that would even make a small dent in Coke’s market share. That’s a moat. With premium generic domain names, their very nature gives them a moat. There is only one SavingsAccount.com, and chances are, in 10 years the .Net registry won’t be branded to the level where SavingsAccount.net would get anywhere near the type-in traffic that the .com gets. I suppose the plural version (SavingsAccounts.com) could pee in the “moat” a little bit–but that’s the worst-case scenario–one other guy to compete against.

Now, by the way, some the preceding attributes would only be characteristics of premium generic domain names–remember that typos, .Info’s, etc. wouldn’t necessarily be great long-term investments. (Yes, some people have made a ton of cash off these other extensions–I respect that there is more than one way to successfully invest. But it isn’t the Warren Buffet style.)

And don’t just take my word for what Mr. Buffet would recommend: check out this list of famous quotes from the Oracle of Omaha and tell me they don’t apply to investing.

“Risk comes from not knowing what you’re doing.”
If you’re new to domaining, but want to get started, I’d recommend you read all you can for a few months before dropping a few large on your first names. (But don’t wait too long to get your feet wet–in another year prices will have risen 30% ;-) )

“Wide diversification is only required when investors do not understand what they are doing.”
Some people think that premium domain prices are so high they can’t possibly go any higher. People in the know–like Frank Schilling–are still buying. Why invest in the S&P when you can get a 30%–or 200%–return on your domains?

“A public-opinion poll is no substitute for thought.”
See preceding quote. :-)

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Better to buy a fairly priced premium .com than to buy the equivalent .Net (even if it’s really cheap). In the long run, the .com will appreciate soooo much more.

“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”
Don’t lie, cheat or steal. And if you have a “crazy idea” run it by some smart friends and then sleep on it before acting. (OK, this applies to most any business.)

“Our favourite holding period is forever.”
If premium generics are increasing in value 30% a year, why would you sell for what seems like a good price today (double the value?) when you could hold onto it for 10 years and quintuple the value?

“I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.”
No need to take risks on odd extensions like .mobi’s, or odd-sounding names that might or might not flop. Stick to premium .com’s that you know will appreciate.

“We believe that according the name “investors” to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a “romantic”.”
If you’re constantly having to buy/sell/trade your domain name portfolio, you’re either not buying the right names, or you’re simply selling too often. Transactions have built in costs (time, escrow fees, etc.) and most of your time should be spent researching, not dealmaking.

“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
See the wave of hopeful (desperate-seeming?) investing in .mobi? Be fearful.

And now for the application: Yes, the underlying economics are in your favor, so you can make mistakes and still be successful. We work in a great business, such that even if you overpay for a name by 50%, you can just hold onto it for 3-4 years and still double your money. But there’s no reason to be stupid–you’re going against pro’s who’ve been in the space for 10 years, and meanwhile there are new wannabe-domainers (who read a Business 2.0 article or something) coming into the fold all the time. More sharks in the pool, and slightly less room for mistakes. Be smart in how you conduct your domain investing, the Buffet way:

  • Buy wonderful domains at fair (or cheap) prices. For long term appreciation, it is probably better to buy a truly premium name at a fair price, then to buy a non-premium (but decent) name at a cheap price.
  • Buy and hold. Then hold some more. A premium generic domain’s value grows in the double digits annually. Say you bought in for 100k and now someone wants it for 250k: it would feel good to bank it, right? On the other hand if they’re offering 250k now, in three years someone else will probably offer 500k or 1M.
  • Remember that the most powerful word in your vocabulary is “no”. Do fewer deals–but better deals. Sell a wonderful name only if the multiple someone is willing to pay is ridiculous. If it’s only a mildly attractive offer, why bother? Conversely, if 50% of your target domain acquistions end up saying “yes” to your offers, you are probably offering too much. Most of your time should be spent in the research phase (or getting yelled at for your lowball offers).

p.s. After all this, you’re probably thinking that I have a gigantic man-crush on Warren Buffet. Guilty as charged, I love this guy. :-)

Did you enjoy this article?

Don't forget to subscribe to the Tropical SEO feed!

7 comments ↓

#1 scoreboard on 07.18.07 at 5:01 pm

First of all, stop blogging, Andy.

Now that we got that out of the way, I would recommend to all you TropicalSEO readers to try to sell your domains to Andy before going to the open market. He is a chronic over-payer of domains.

I must go hide now before he and PG send ninjas after me.

#2 James Dunn on 07.18.07 at 7:24 pm

Great post. I agree that .com is by far the best extension for domaining, but if you are going to build up a site, I think that .net and .org can also be valuable. Here’s my mini-list of why I’m going to buy a .net on a generic domain name.

- I contacted the owner of the .com and he won’t reply, so I couldn’t get it anyway.

- Even if the .com was for sale, I probably couldn’t afford it anyway.

- It will really help me to optimize for the competitive broad search term if I have an exact match, meaning another .com wouldn’t be as good.

While domaining will undoubtedly yield high returns, it does require a lot of startup capital to be invested for a few years. If you buy a premium domain for a fair price, it may not be very liquid either, you have to wait until the right people with big budgets come along and decide they have to have your domain.

Also, as the value of .com rises, it will lift the value of the .net and .org extensions as well to create a normal distribution curve. There are only so many good generic names related to home mortgages (or whatever) that end in .com. When the biggest bidders have bought and developed the .com versions, the second highest bidders will have to turn to the .net and .org extensions.

Furthermore, as the population becomes more familiar with the Internet as a whole, they will also become more familiar with .net and .org. Geeks have no problem going to sourceforge.net or del.icio.us.

#3 Raj Dash on 07.19.07 at 12:05 pm

Fantastic post with such concrete advice. Buffet’s been a hero of mine, business-wise, for a long-time (one of very few billionaires I admire, the little I know of him). Maybe one day I’ll win a lunch-with-Buffet auction and invite you, too :)

#4 JohnC on 07.19.07 at 2:29 pm

Great post!

Personally I’m not as convinced about the potential value in .net and .org when used as a substitute for an unavailable .com - for resale anyways.

As I’m a UKer I’m having a look at what is available in the .co.uk market. But of course if it’s type-ins you’re after then .com reigns supreme.

Just getting into the domains domain - suspect I have much to learn.

John

#5 James Dunn on 07.19.07 at 6:53 pm

http://domainnamenews.com/domain-sales/sedo-brokers-biggest-info-sale-to-date/733

.com isn’t the only game in town.

#6 modernnomad84 on 07.20.07 at 9:58 pm

Hey-

I love your site, I check it almost everyday even though it’s usually updated much less frequently than that.

Anywho- I’ve really enjoyed what you’ve been saying about domaining, branding, and enjoy your writing a lot.

I sat down a few days ago and wrote out everything I know about domaining and also a bit about how that coincides with Penguin Life and put it all on one page. I thought you might like it and I couldn;t find your email to email you directly, so here you go:

http://www.uglytheme.com/penguin-guide-to-domaining-how-to-invest-in-domains-and-be-an-above-average-domainer-all-on-one-page/

And, you’ll be happy to see a linked to TropicalSEO a few time in the body…

Thanks for all the great info, and I’ll be commenting here much more often now that I’m registered.

-Brad

#7 allthings.tv on 07.21.07 at 9:16 pm

Love your site. Short term reader, first time poster.

You draw some remarkable parallels between investing in stocks and investing in domains. I am curious to hear what you think of the .tv extension’s brandability as an extension for multi-media websites.