Domain Investing in Trends
In the stock market investors can sometimes be grouped as growth investors and value investors. Ill look at these two types of investing; and then apply some of the elements of each that I think apply to domain investing. Ill take you through a history lesson on earlier days of domain investing leading up to an analysis and opinions on trends and some tips for trend and theme investing. So first off I will cover growth or go with the trend investing.
Growth investors are investing in those companies growing earnings. Now everyone likes earnings. Analyst go out and make the earnings assumptions, or the company provides. So you are investing on the current facts. And since everyone likes earnings these companies trade for a high multiples of their earnings. The stocks are expensive, but in fashion. Most importantly, these companies are most likely to continue to increase their earnings. Think Facebook, Salesforce.com, McDonalds.
Investors pay a premium for the current earnings, assuming the earnings will increase in the future; making their premiums diminish – as other investors pay an even higher premiums. Holders aren’t selling, supply is restricted and the only way to get these “safe” shares is to pay up, so the prices of theses stock keep going up.
This will happen with certain domain name trends and market segment. This could be names by subject, attribute, where you buy and sell or as new undiscovered uses come about. When you invest in the middle of and alongside others in a domain trend big enough to support an active market; you “feel” better. You feel you only outbid another investor by a small bit and your name is liquid at the price you paid. In a world of normally non-liquid domain names, this feels great and can become attractive and addictive.
Back to stocks. Each investor has the comfort that others know these stocks are winners, when you buy into the stock, no one knows how long you have owned so the perception can be you have owned since the beginning of the current reality. People love to hear about your investment.
So in domain name investing the same thing is true. Domain themes and categories that are current “working” will continue to grow stronger, and existing investors keep investing. New entrants raise prices as they enter and everyone buys.. Buy Buy. Its the one thing all domain investors can do, click a button and spend money and “feel” like they made money.
Its similar to the storage wars show where they would show buyers of storage units paying out cold hard cash, then letting an on screen calculator tell them how much they made, based on their own self-assessments of what each item was worth.
So, increased buying raises wholesale prices, further reinforcing the “cant miss” nature of certain themes. Those themes that everyone likes; and those attributes in each them that everyone says are cant miss, self full-fill higher demand, seen un-getable which perpetuates each sub-segments strength.
In the past this has been evident at different times with PPC names, Names with High Search Stats, Short Names and Brandables. I’ll start tomorrow blog with the short names and brandables trends. I’ll cover revenue names and stats names below.
Still with me?
From 2006-2009 and beyond for serious investors, PPC revenue names were liquid gold. Investors had portfolios of names producing $10,$100,$1000 or $10,000 or more per month. You could value the names with easy math, buy or sell for a number s of years or months revenue. As more buyers with more capital entered the market prices rose as they put their money to work, paying at first rational – and then above rational prices. But it didn’t matter because others saw their success, and they had revenue coming in each month to provide even more capital to buy. That restricted supply as “never sell” investors only bought. Financial buyers followed along. In trend investing, many new investors just say I want what others want – and they no one else wants it I don’t either.
Further since many investors also owned parking companies, they could buy a portfolio and immediately use a better revenue share to reduce an apparent market based buy to below market. Everything worked great until some portfolios started showing leakage on actual revenue versus projected revenue. Combined with the inability to legally profit from trademark names, and steps by the monetization providers to protect advertisers punched some holes in the bull case, and actual results stared to drop – and this overbought grouped slowly came back to normal. But when companies and investors had paid up for future growth, normal was a loss.
The actual names didn’t matter. Their appeal to retail buyers didn’t matter. It was clicks and revenue and trends in revenue that mattered. In this period information and methods were mostly private and proprietary, and still are for the most part. Revenue information started out being just private, you had to trust or certify prior revenue numbers; or have way to confirm estimates numbers on your own.
So with this GROWTH area, your were buying the current trends, paying market or above market and your getting reinforcement of even higher buying everyday. So as the trend continues, todays’ over-payment looks good next month, so you keep buying and your thesis is supported by LIQUIDITY at the WHOLESALE level with other buyers reinforcing your value in the short term. Success and sales are widely reported and universally accepted as winners and what you “should do”. E-books abound.
Selling is futile, trying to time when the market ends just means you look and see you sold too soon. Many investors capture their profits with trading gains. But then the market keeps going up, making investors “feel” like they are always leaving money on the table. Each week brings higher prices and values. Fortunes are built buying and never selling as specific markets go to new heights, replaced by newer heights.
Now in domain name investing we have wholesale and retail markets. Most names may have a 5-10:1 spread between a wholesale value – where domainers plan to buy names; and that value that with patience retail investors will pay for at some time in the future. Investors are hoping to capture the liquidity discount with time and patience waiting for the right buyer to pay the highest and best price.
But this attribute of domain investing may not matter in a growth market because the wholesale market itself provides the liquidity we normally have to wait for a retail buyer to provide. Just buy any revenue name. And certainly the criteria for determining whats in a trend gets expanded.
In many cases as all the good revenue names were in locked up portfolios, investors started to resist prices once they became unprofitable. This never meant that revenue portfolios lost their value – they always will be a better investment grade asset in domaining. The revenue gives you staying power and a return on your capital. You earn income each year (called rents in economic terms) and retain an asset with the potential to provide rents well into the future. But portfolios became fully priced. As prices rose you didn’t have a built in profit or moat at purchase. Buyers found they were the market with no one else to sell to at higher prices.
So a key attribute of growth investing, or any trend, is the good pure examples of the best parts of any segment will always be valuable, profitable and investment worthy. As good examples get scarce, the definition is stretched to include anything close in nature. These fringe names may not merit the value the pure names in a trend earn and deserve. But they (fringe names) are available.
Whats important to note is without a constant stream of new capital or new buyers the fringes of any segment, or “anything” in that segment may not provide the returns needed give the illiquid nature of domain names.
Some investors who realize the end of buying everything is coming are able to MAKE DECISIONS ABOUT THE QUALITY OF THEIR ASSETS early; and SELL while there is still residual demand from the years of good times. This may be to later, leveraged large scale buyers who use history to assess investability, and come in mature themes over time.
Early investors know the long term value of their assets and see selling prices as still extremely profitable. As chinks in the armor of the constant growth appear, new investors hold to hoping values will come back; but for early investors years of accumulated profits make it easy to sell, and they make money even as values and prices are waning.
So in a growth market turned down, or anything with what we try to label as “pump and dump” toward the end – remember early investors are selling in quantity during what seems like declining prices to new investors – but for them its realizing their accumulated gains.
In growth domain investing the ever increasing wholesale market drives investment and returns. There is a perception of liquidity. The normal liquidty spreads narrow as buyers accept more than normal discounts, even paying up to where the wholesale market becomes the retail max value. Remember, most non-revenue domain names are illiquid assets.
For revenue portfolios, prices maxed out, investors looked elsewhere to get the same prospective returns. To get the buy price right, investors soon looked to predict which domain names could become revenue names. Rather than paying 7 years revenue for an actual earnings name, why not look to pay 10-20% of that for-sure future revenue value using the potential stats.
So this cycle of perceived liquidity prevailed again 5-10 years ago when a names statistics determined a “liquid” for-sure value. If you had a name that was an exact match, and the stats said there were 1000 searches at a ppc rate of $xx.xx, you could use those stats to put a value of a name. The best names and expiring name auctions got bid up. Investors saw liquidity at the wholesale level and buying these type of names resourcefully could bring about quick flips to other domain name investors. That was much easier than waiting for a buyer to come over 2-8 years. We did have enough end users also buying to give investors the DESIRED DOUBLE POP of strong wholesale support, and still potential 5-20x of end user sales.
The best feature to look for in a domain investing trend, is wholesale liquidity and retail sales at high multiples.
So back to stats names, added simple appraisal values of domain names could be determined in bulk. Now you didn’t have to examine every name, just bulk upload a batch of names and see the high value estimates. So as we added publicly available valuation estimates based on search statistics you could trade and represent hypothetical values and enhance liquidity by providing information to buyers. Seller trustworthyness didnt matter, what were the numbers. We gained more participants.
A attribute of growth investing in domain names is these unique and special assets become commodities, and pretty soon the name didn’t matter. Buyers were posting they will buy any name with a certain stats for $x,xxx.
This was familiar to me to a time when stock value estimates went from balance sheet numbers of net worth and equity and prices based on prior earnings; to a time when you could look at next years estimates versus this years estimates; determine a growth ratio and then apply that multiple to next years earnings to get a price target. Even hobby investors could now use publicly available estimate to come up with a perceived floor or rational value that they could use to buy, with some comfort.
So our industry had a strong dominant trend for a few years buying and selling based on stats and Estibot values. Again we seemed to suspend the normal rules of domain illiquidity because we had a stronger trader and wholesale market. Holders didn’t sell, so new buyers had to pay more and this class of names got fully valued, and still are today ..as they should be. As usual, the ability to buy “any” name in the class and profit stopped working.
So as classes or trends first get discovered as they go through a stage at the beginning where buyers are selective, there isn’t apparent wholesale liquidity, and it “feels” risky. At this stage discussion on forums and blogs is mostly wait and see, or negative. Commentators want to take a go slow approach. Most investors under-invest at the time.
Another risk long term in your thinking, is to always point to one good early sale, where you bought when lots of choice were available to justify overbuying later at the bottom of the quality spectrum.
Then, as more buyers come in and sales and values are reported, its becomes more about following the trend, buying any related asset and as wholesale liquidity appears and buyers get more confident. Selectiveness holds you back, buy more.
Names still may not be getting the end user values we want. And owners are constantly raising expectations, so again not that many current sales means investors have to commit more capital trying to capture that last good deals. Investors who tip-toed in with a small investment, not ramp up and buy in bulk with their and others money.
The best thing a domainer can do, if they have an idea of their risk capital, is own enough assets in a possible trend with staying power, to see inquiry activity and offered prices – BEFORE THE MARKET DOES.
If your selling at retail and getting offers you pass on, you KNOW its working and don’t have to hear it from blogs or forums. In many industries, you won’t truly hear of great trends publicly until the investment case becomes mature. I’ll have an example tomorrow of how in domain name investing that is not always true. We do have professionals who have been generous in their education and thoughts, I’ve tried to be there also, when suitable.
This high buy prices with strong sale prices period can be dangerous for investors using credit and pretty soon they “need’ to get those promised high prices. In the marketplace there is passionate discussion now and its clear to most a trend will work forever. It is at this stage that I recommend spending more and more time assessing the trend and them and what others are doing. If your planning new and future buyers buying your names, stay current on the trend. It doesn’t me sell, its means be accurate.
So stay current in both respects. Don let time or profits of 30-3000% make you exit early if you’ve really grabbed on to something special. And also, don’t let the thought that a certain trend will never end keep you in, with more at risk for its inevitable rationalizing.
Ask yourself tough questions, if values fell in the area your researching by 50%, would you still stay in?
The best piece of advice I can give domain investors is keep an accurate self-assessment of the quality and substitute-ability of your names. Even if your not selling in the middle of an uptick, know what you would always like and keep inside the castle walls, and whats trade-able.
Secondly for those who stayed this long, Another attribute of growth investing is as the trend wains, selection becomes important. Not EVERY asset will go up. In stocks quality of earnings becomes important. In domain investing traits and qualities of a portfolio became really important. In domain name investing we also have singularly unique assets. If I’m buying Apple stock, you can buy apple stock too. In the middle of a trend popular trend, it seemed you can buy any revenue name, any name with a $2000 Estibot value, any 4 letter name. But as liquidity drops back to normal. quality and selection of the domain names you own in a popular trend or segment becomes critically important.
And lastly each name has a highest and best use. Don’t let simple rationalizing over a name have value in multiple places. Owning names or having too high expectations like “because its a revenue name that ‘could’ be brandable” keep you in a name longer than you should be. You will get the value based on its highest use, so solely focus that highest use. Other possible values only kick in when you have lost 50-80%, a place i like to avoid.
Tune in Wednesday for 2 More trends and what we can learn.