Boom! Why domains are better than dollars
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The Sage of Omaha is a pretty smart guy. He also may be the ultimate insider trader who happens to be tight with Lloyd Blankfein of Goldman Sachs, Barack Obama, Bill and Melinda Gates, and pretty much anyone else in the world with a major part in the global economic theater. Pay attention to his latest moves and you will know why domains are better than dollars.

These guys are tight!

These guys are tight!

For the purposes of this post, I will steer far clear of geopolitical conspiracy theories involving Buffett and just focus on the substance of the moves that Buffett has just made. I will also add my own perspective on why I think it matters to domainers, which may be entirely wrong.

My first introduction to Buffett was in 1984
As a youth, I was a stock trading fanatic. I began trading stocks at age 12. My entire room was lined with hand-drawn point and figure charts culled from data downloaded from Dow Jones News Retrieval on an Apple II. I remember my Dad — Willem Monster, a University professor in biomedical technology at the time — arranging an opportunity to go meet with the CEO of a public company (United Medical). I grilled the then CEO, a guy by the name of John Aglialaro. After the meeting, I bought the stock after sensing bullishness that I thought the analysts had not picked up on. Within a few months, I sold the shares for a very tidy return. I was hooked. I was mowing lawns and delivering newspapers, and then investing the proceeds in stocks, options and even tried trading commodities until I got my ass kicked by mistiming an expected market move!

By the time I was 17 years old, I was pretty sure that I wanted to pursue a career in finance or investment banking. I had an opportunity to work on the floor of the American stock exchange as part of a high school culminating project. For 6 weeks, I lived as houseguest in Brooklyn with a Hasidic Jew named Joel, who is a cousin of one of our long-time neighbors, the Weinbaums. I  commuted from Brooklyn to Wall Street on the RR train to work as a Specialist’s clerk for two seasoned traders — Jerry Greenwald and Russ Ingallinera. Besides experiencing life on Wall Street and a developing a taste for knish,  I  remember learning three pearls of wisdom from the old hands on the trading floor: (1) Don’t fight the Fed, (2) Bulls and Bears make money, but Pigs get slaughtered, and (3) Never, ever bet against Warren Buffett!

Buffett just bet hugely on a RAILROAD
For anyone who does not know, Buffett’s main investment vehicle is a company called Berkshire Hathaway. I have never owned the stock, but have always respected the man. Buffett described the latest investment in the BNSF Railroad as “An all-in bet on America’s future“.  Got that? One of the most connected and wealthiest guys, who is now in the twilight of his professional career, has just made an enormous financial wager on a railroad! What’s special about this railroad?  There are analysts who have theorized that it is really an energy play. This for two reasons that are discernible: (1) rail is more energy efficient than road for transport, and (2) this particular railroad is connected to one of the largest coal deposits in the world. Railroad monopolies have worked brilliantly before. They were ultimately broken up for Antitrust reasons. However, Obama and Congress are on board with Buffett and coal so I would say not likely to see Antitrust rumblings.  Why? The Cap and Trade bill passed and this means a big new federal tax on energy-induced emissions. In other words, the Fed will get a big kickback on coal-based energy until all the emerging clean energy technologies can be developed and deployed.

My interpretation for domainers: The next oil shock is coming, possibly triggered by Israel crossing swords with Iran. Throw in a blockade of the Gulf of Aden and/or the Straits of Hormuz, and you have a 1973-style oil shock. However, unlike 1973, this oil shock will finally put a knife in the longstanding US dependence on imported oil.  That is good news for electric cars, electric trains, and coal fired power plants, in part because solar and wind energy are not ready for national prime time and nuclear energy is politically a hot potato.  A  global oil crisis would be good news for the internet since in the immediate aftermath of an oil shock, the consumer will be ordering online and working from home rather than driving to the mall or the office. Timing? After the Senate passes the Healthcare bill and well before the 2012 election.

Buffett borrows big, split his stock 50:1, all while India buys 200 tons of gold
To finance the deal to buy BNSF, Berkshire Hathway is borrowing $10 billion, by assuming debt on the balance sheets of BNSF plus borrowing another $8 billion.  The man who historically has eschewed debt, now has a large dollar short position in his portfolio.  Also, in case, you missed it, Berkshire Hathaway’s stock just got affordable for everyman; the stock is expected to split 50:1. This is unprecedented. Buffett is 79 years old. He waited this long to split his stock. This coincides with the Fed decision to leave Fed funds at effectively zero while the official unemployment rate soars past 10%, and the unofficial employment rate goes past 20%. And to top it off, almost on the same day, India bought a huge amount of gold from the IMF, effectively a vote of no-confidence on the US dollar as a store of value.

My interpretation for domainers:  While the pattern will not be a straight line, stocks are heading higher for now.  The effective policy of the Fed and Treasury appears to be to force cash off the sidelines by creating moral hazard for anyone sitting on paper currency for too long. The velocity of money will increase because the “risk of omission” (aka, do nothing) is going to be greater than the “risk of emission” (aka, do something).  This is good news for domainers, especially those with premium, English language .com names, because (1) domains can be priced in any currency, (2) owned by anyone, and (3) operated from anywhere. As a result, I believe this will be an opportune time to practice capital efficient domain development.

It was the best of times, it was the worst of times

Tale of Two Cities
So starts the Charles Dickens classic,  A Tale of Two Cities.  The tale takes place around the time of the French Revolution — yes, another major war time in history.  Those who knew what was coming, and had prepared, were living fat.  Those who did not were as poor as poor can be. Today, I know domainers that are not renewing great domains because nobody is bidding on them at Sedo, and because their parking revenues are down 70%. Choosing between beans for the family and a domain renewal? That’s nuts. If you own a domain name with more than 1,000 monthly keyword searches per month that is not trespassing on somebody’s trademark, and has keyword-related PPC advertising, you have a development candidate. Consider doing some modest development of the domain, and then sell it to a retail buyer who is late to the party with executing their own online strategy. These opportunities are out there and the tools for doing this are getting better and better. I call this practice “Build – Operate -Transfer”, the subject of my previous post.

Why does selling domains — and starter websites — to end-clients really matter now? As I see it, one end-client sale of even a weak website should generate at least $1,600, which is about Sedo’s average domain sale based on latest reports by management at the Sedo Pro conference. This is consistent with other reports, including by Ron Jackson, where the range has been from $1300 to $2500 per domain.  More importantly, developed websites that have some traction in the market, usually sell for vastly more. The financial implication to a cash-strapped domainer of a single $1600 sale is the ability to renew 200-250 domains at a renewal price of ~$6.50 to $8.  So, by being a little scrappy with site development, the domainer has just added one full year to their runway to achieve an even more meaningful exit on a whopping 200-250 other valuable domains that can be sold or developed in the upcoming bull run in domains. In other words, the leverage is enormous.

And that is a partial explanation for why I am excited to be developing domains in 2009.  Sorry for the long post.

Join the discussion 28 Comments

  • Sahar Sarid says:

    No need to apologize for the long post Rob, this is a very well thought out writeup. Thanks for the history lesson and further education.

    Best,

    Sahar
    Bido.com

  • thanks_great_post says:

    One in a million people will understand these types of things and fiat currency manipulations although the math isn’t complicated.

    I haven’t even finished reading this yet and you have come to the same conclusion as me. Awesome!

  • Duane says:

    Interesting and very true. Develope – cash in and sell! Property with a rented out business building making dollars will always sell higher than something empty or under construction.

    Good Post

    Duane
    Jeko-invest.com

  • jeff says:

    Excellent post!

  • owen frager says:

    Great post. The end of the age of oil is coming. Be prepared: http://collapsemovie.com

  • Nick Uva says:

    Very good stuff. The only thing I would throw in is a caution that I do not expect registrations to stay at their currently low prices. The more the dollar deteriorates the more we can expect to see renewals go back up toward the $100 prices of the early days.

    • Rob Monster Rob Monster says:

      Agree on the likely direction of reg-fees: up from here. It forces development which is a good thing. Taxes have the same impact in the physical world. I am not wanting this per se, but if a site is parked or inactive, it should be taxed at a higher rate. There is no truly elegant solution that does not come with tradeoffs.

  • Well written Rob. I would tend to think investment in the railroad system had more to do with land rights. Those tracks and land cut across most of the nation and that is VERY valuable. Black fiber and other technologies can easily be laid underground next to RR tracks without the quagmire of litigation or political clout it would take to lay new materials across state lines.

    Agree that domain names, that are globally known, offer a greater return when developed and produce long-term leverage. More so than gold which you can always bury but can’t eat and is hard to carry ;> . Dollars should be converted now while it still has some value.

  • thanks_great_post says:

    @Michael Castello

    1. I am a big fan!

    2. It has to do with using 44 billion of counterfeit money to buy something of value. And, this something of value runs on coal, not oil like our article author points out.

    General RE, Wells Fargo, Goldman Sachs, GE etc etc would be bankrupt without federal fiat theft to Warren Buffet. The reason he never split the stock was to keep it out of the hands of people who could sell his stock. He knew the whole time..genius but not for the reasons the sheeple on cnbc say. So, with gold over $1,100 and populist tensions heating up..he made his final move (for now)

  • thanks_great_post says:

    Just to clarify, general re being the largest..

    these are berkshire main holdings…all insolvent companies (not in bizarro world)

    so berkshire = insolvent

  • Great points Rob.
    Thanks for your coined term…”Capital Efficient Domain Development”.

    Ed – Michigan

  • Does EPIK plan to offer domain/website for sale listings? No doubt domainers are looking for monetization options and EPIK offers some nice developmental resources. I have already noticed a number of my EPIK-listed domains on the first two pages of Google or BING for the domain’s keywords. If a potential buyer were to see the search engine ranking and as well the monthly traffic (influenced by search results not previously experienced in parking), perhaps an agreement could more easily be reached than for a parked domain with light type-in traffic. EPIK would earn a commission on the sale.

    • Rob Monster Rob Monster says:

      @Leonard – We do currently have domain/website selling capacity using the auctions.epik.com site auction capability. With the recent release of Epik 2.2, we integrated auctions into the Epik control panel, so you can actually list a domain for sale by clicking “Sell” from within the “MySites” tab which sends the site to auction. And because we host the site, we can provide independently verified data about site statistics to a prospective buyer. This is indeed where it is all headed: Acquire — Develop — Monetize — Sell. Epik is adding capability at each stage in that value chain using an integrated platform-based approach. More to come on this point.

  • Tasha Kidd says:

    Railroads are one of the most efficient ways to transport goods, and keeps the load off aging interstate infrastructure. Railroads are green in the energy savings, but US is behind the world in next generation rail technology. It’s coming, and there are projects throughout labs in our country. Also, with a better rail management system in place, the rairloads could be far more efficient in people transportation, outside the Eastern Seaboard corridor. As it is in the Midwest, now, it is in many other places: the railroads own much of the rails, and the few Amtrack trains that come along have to constantly stop for the long freight trains. If they managed things better, they’d let the passenger trains through, so they could be reliable, and therefore used more, and with a minimum interruption, freights could continue.

  • Jessica says:

    informative, educational, and analytic. thanks for the effort, rob. i see you’re quite experienced in the field of “economics.” 🙂

    i’ve only recently gotten an interest in developing my domains after finding out their potential…some of them have more than $10 average CPC, which is quite telling…so this morning I’ve started developing one of my generic .info domains and plan to do the same with the rest.

  • Excellent read. It is good to know that there are intelligent thinkers out there. I agree with this well thought out article.

  • Noo Yawka says:

    I appreciate your analysis of the world situation. Here are two places where I disagree:

    1) Railroads have been the ‘next great thing’ for many years. The arguments about energy efficiency have been used for many years. I used to subscribe to Forbes magazine and read it from cover to cover. About ten years ago they had a long analysis of railroads and the analysis came to the same conclusions you did. I followed railroad stocks subsequently. Sorry, but with all those cogent facts in their favor, railroad stocks didn’t do so well. Yes, railroads can be energy efficient, but there are other factors against them which counterbalance that one major, major plus.

    2) About Iran closing the Straits of Hormuz. I am not a military person. I have read on military-oriented websites that the US is prepared for the possibility of Iran trying to close the Straits of Hormuz. You would have to go to better military sources than me to get details. To make a long analysis short: Iran tried and failed (at very great loss) in the past to close the Straits, and the US military is prepared for the next round. Israel may or may not have the firepower to deal with Iran’s nuclear installations, but the defense of the Straits is in the US’s hands. That makes coordination between Israel and the US necessary. But it throws into question your assumption that an oil-less future is in the cards in the immediate future.

    But there is always a good reason to own and develop good websites.

    • Rob Monster Rob Monster says:

      @ Noo Yawka – Thanks for the comment. To be clear, in my original post, I only speculated on one of several scenarios that might trigger another oil crisis. People might view this as being a “Black Swan” event. I think it is predictable, and Buffett is smart enough to see it and has bet accordingly, effectively signaling that he knows something that the rest of us do not. Also, if you read my post, the acquisition of the BNSF railroad refers more to the specific application of transporting coal deposits that have been vertically integrated.

  • Gil says:

    Very Interesting post Rob.

    I agree that an oil shock is coming, but the trigger is of course difficult to predict. The mid-east is volatile and unpredictable.

    Once that oil shock occurs, I predict that the question of domestic drilling will come up and tapping our domestic resources will be at the fore front. In my view, this is analogous (a bit of stretch maybe) to domain development. Domains are also an untapped resource that once developed provide means to create or supplement revenue. There is a finite amount of oil on the planet and there is a finite amount of “good” domains. Developing domains and creating a site that is more marketable takes time, so domainers should plan ahead.

    Buffet’s purchase of BNSF clearly shows that coal will a big factor in our energy future, but perhaps the ability to transport other materials could also be a factor in Buffet’s decision.

  • Now if only someone could land Warren Buffet as the keynote speaker for a domaining conference… Hey, I can dream 🙂 – Joel

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  • domainscot says:

    great blog and spot on with the development side of things

  • Brad Pit says:

    great post. I agree with this well thought out article.

  • wix says:

    Great points Rob. Well Written

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