Erik’s Blog: Board Shorts and Business Suits

OK, so I’m going to let a little bit of the cat out of the bag with this one. My method isn’t rocket science and it isn’t like I’m getting crazy go nuts lucky. Even without the big sale in December that I mentioned in Part II, I would have still made a 76% ROI this year just on month to month earnings.

Note: If you haven’t read the first 3 sections in this series start at the front and and link through there with:
Part I - How to Make Money Buying and Selling Domain Names

On to the good stuff. I use a type of value investing approach to buying and selling domain names. I look for names that people want to offload quickly and are willing to let go for cheaper than if they waited around for the right buyer. With so many domain names out there there are plenty of these that get bought and sold every day, so don’t think it’s that tough to find your diamond in the rough.

I try and follow these basic steps:

1. Reduce Risk by requiring at least 3 months revenue stats
2. Long term outlook and limiting seasonality
3. Limit exposure to potential trademark infringements
4. Buy at a low earnings Multiple

By following these 4 steps I’ve been able to make a pretty decent return in 6 months and so should you.

1. Reducing Risk by Requiring At Least 3 Months Revenue Stats

The main way I reduce the riskiness of the names I buy is by requiring proof of 3 months of revenue and traffic stats or more. Now a lot of names are bought and sold based off of only a months revenue stats. I’m not going to say that I won’t buy a domain name with only a month stats proof, but I try and limit the number of these names that I purchase. (For more on stats see Part II)

By requiring proof that the domain name has had traffic and revenue for at least 3 months you can better assume that the traffic and revenue will continue as such in the future. This is especially useful for typo domains. Since typo domains aren’t really useful without the non-typo domain name, they don’t really hold any “intrinsic value.” You can’t really put a price on it like you could something brandable such as BeachBums.com or something like that.

If you know a domain name has made money in the past you can better predict it’s earnings in the future. This isn’t fool proof as you’ll see with the next section. Some names that are typo’s could come crashing down on you and you’ll loose your initial investment.

2. Long Term Outlook and Limiting Seasonality

If you are buying a type-in and especially a typo you need to look at the staying power of the name. If it’s a typo you need to take extra care that the real name your domain name is a typo of will stick around. There is no set way to do this but if you’re getting into the business of buying typos you need to get good at this. You can do overture traffic analysis, look at the PR, the links, is it in the news, is it membership based, is the membership growing?

These are only a few of the things you can look at but they are the main ones I look at when buying a domain name. You need to come up with a good method to make a reasonable inference as to the domain names staying power (if it’s a typo) or to it’s value as a brandable name.

If the name is a direct type-in you’ll need to usually concern yourself with if it’s a fad or not. Is the name going to continue to be popular and warrant people typing it into their browser? Does the name show up in search engine results near the top? The same can be said about typos as well.

Another similar thing to look at is the seasonality of the domain name. What I mean is does the name only get high traffic in a particular season. You can check that out on Alexa if the site is popular enough. Is it about lodges in a ski town? Do people look for bikini’s all year round? Be careful of these names and be sure to check the dates on the stats you are shown. Sometimes they’ll show you 6 months at a time but for the last 3 months the name hasn’t received any hits because it’s about a small town called Punxsutawney.

3. Limit Exposure to Potential Trademark Infringements

Buying a name like GooglePics.com Might put you smack in front of a C&D letter from those guys at Google, so weigh out what the potential risk you face that the company involved in the infringement portion might want to come after you. Especially if they have a history of doing so.

Check around on the forums and look at how much traffic the name gets. If it only gets a few visitors and is small potatoes the infringed company probably won’t want to waste their time and resources on you. But maybe they will. It’s all a guessing game there. Plus I don’t really know the exact rulings that would occur if you tried to claim that yes Google owns Google put I’m trademarking the whole word GooglePics. Thank goodness for no spaces in web addresses.

Best thing to do is ask a lawyers opinion, or take the risk.

4. Buy at Low Earnings Multiples

This is the big one. You have to be patient and wait for deals. The easiest thing to do is to get excited and buy a name because it seems like a good deal but you end up buying at a high price and increase your risk.

If you assume that in the worst case scenario you won’t be able to sell the domain to anyone even though it continues to make money, how long will it take to make your money back. That’s the risk of it all. If, at current earnings based off your work in step 1, you buy the domain name at 10 times monthly earnings your risk is a lot lower than if you buy the domain at 20 times monthly earnings.

The risk comes in because you never can be 100% sure that your traffic and thus revenue will stay. The Internet is a crazy beast and a liquid one at best. It moves and shakes on a moments notice.

The best advice I can give you is to wait it out. Buy value. Just look at the return I made if you need proof. I could buy at high multiples, without proof, and without knowing if the name is going to have any staying power, but that would be just crazy talk.

In Part V I’ll be looking at what I think the future of domain name investing is.