We see domains as an asset class and suitable for passive investing. We are not in the business of flipping domains. We acquire domains and other online assets (content, backlinks, etc) that add value to our domains.
More on Domains:
Domains as an Asset Class
When most people think about investing they think about stocks and bonds. When people think about alternative investment classes, they think about real estate, gold and other commodities, currencies. Ask them to think about something more esoteric and they might bring up venture capital, private equity or even distressed securities.
Most of these asset classes are both huge and sophisticated. They are also dominated by institutional investors. Why? Because institutional investors are managing large amounts of capital and they need to deploy them into large and liquid markets.
But what if you are a relatively small individual investor? Do you compete with the big boys and invest in stocks and bonds or are there more esoteric areas in the investing universe where you can develop an edge and get high returns of capital?
Finding Alternative-Alternative Asset Classes
Most individual investors are not full-time investors. Therefore, they are investing on the side and they can’t invest in something that requires daily effort in managing. So, a prerequisite of finding “alternative” alternative asset classes is that they should require minimal management. Flipping real-estate while a form of investing is not an asset class and requires high involvement.
Note that we did not say that they should not require research. Every investing requires research and know-how. Investing is never easy.
What if there are more esoteric asset classes that are more suited for small amounts of capital? Asset classes, that are so small that you can’t deploy big pools of capital to them and expect a meaningful return? An asset class that is constrained by size, will theoretically have less sophistication and might offer an investor greater chances of deloping an edge and generate high returns. Higher returns than he might generate by investing in more sophisticated markets, such as the stock market, which by design is aimed at larger pools of capital.
Domains as an Asset Class
Domains, viewed as an asset class, are interesting for a number of reasons:
- You can easily buy domains through registrars and your ownership will be relatively secure.
- Domains are unique, hence have interesting supply-demand characteristics.
- As more individuals and, notably, businesses enter the online realm, domains become more valuable.
- There is a relatively deep and active aftermarket for domains, through various marketplaces and brokers.
Investing in domains is not new. Not by any stretch of the imagination. People have been investing in domains ever since the first domain was registered on March 15, 1985. But investing in domains has changed with time.
Domains with Scarcity Value
Most domains do not have any tangible value simply because they are not scarce. TheDomainInvestmentServicesCompany.com is a worthless domain simply for the fact that one could easily think of an alternative domain that would be of equal or better quality. And you could probably find an alternative that has not been registered yet.
The only real way to find value and generate high returns with domain investing is if you can develop a way to identify assets that are or are likely to become scarce and in demand with time.
The Art Dealer Analogy
Murray Stahl of Horizon Kinetics wrote a fantastic essay about art dealers from the standpoint of portfolio management, called Art Dealers: The Other Vincent van Gogh. In the essay, Stahl makes a very astute observation:
“The great art dealers of the 19th and 20th centuries amassed enormous fortunes. At first glance, you might have thought that such a feat was impossible, because the great art dealers didn’t handle the bulk of the art volume. In other words, they didn’t make the money through their business. The great auction houses to this very day facilitate by far the bulk of the art sales. Those auction houses include Sotheby’s, Christie’s, Phillips de Pury, Tattersalls, Lyon & Turnbull, Hôtel Drouot, (owned by BNP Paribas) and Bonham’s, which was established in 1793. The oldest auction house in the world is Stockholm’s Auktionsverk, established 1674. Other auction houses are the Swedish company called Bukowskis, established in 1870, and the famous Dorotheum in Vienna, established in 1707.
Those auction firms do the bulk of the business in art, but the dealers, small as they are, accumulate the fortunes.”
According to Stahl, the great art dealers of the 19th and 20th got their wealth from holding on to appreciating assets, not by flipping them. A common trade amongst these art dealers was that they approach their business from a portfolio standpoint. And for good reason.
The fact is, that they could not know which of their artworks would be masterpieces. Even the painters themselves could not identify the winners amongst their collection. Pablo Picasso, for example, pre-sold his painting in a given period to his dealer. According to the agreement, he was allowed to pick a certain amount of painting to keep for himself. There is no evidence that he kept the most valuable pieces.
As a result, the astute art dealers would work with a selection of artists and acquire a portfolio of their works.
The Real Estate Developer Analogy
Domains aren’t exactly like art though. Domains aren’t created by artists. But they do the characteristic of exclusiveness as each domain is unique.
Perhaps domain investing is more akin to real estate development. A top-level domain is like land on which you can develop a property. Some land is more valuable than other lands, due to its location and other characteristics. And those characteristics are dynamic and subject to change. Domains that included the words Bitcoin or Crypto had next to no value a few words back.
The Value Investing Analogy
We approach domains and online assets from the methodology of value investing. We want to find and identify domains that have an implied value attached to them that is higher than the cost of registry or the cost of acquiring them.
In many cases, these are domains with history. Domains that have been dropped but still carry value.
Once we acquire a domain, we try to salvage that value and then keep developing it by taking steps that make them more valuable to a new owner.