Distorted Idea of Expected Profit

When I review my investment portfolio, I am content when I see 10%+ returns on my investment. I am ecstatic when returns are higher than that, although I know that paper gains don’t mean that much. YTD returns for the S&P 500 are around 7%. The 10 year average is just under 8%. I don’t know about you, but I expect far greater returns on my domain investments. Perhaps I have a distorted view of expected profit?

When I buy a domain name, I am buying it because I think that it is worth more. How much more really depends on the domain name and price I paid, but if I only thought I could sell a domain name for a 10% profit, I wouldn’t buy it.

The domain name resale market is far more illiquid than other markets (stocks, commodities, real estate, currencies, and other investment markets). If I buy a domain name today for $5,000, I might not be able to sell it tomorrow for close to $5,000. I might not even be able to sell it for $500, depending on the domain name. In the case of an equity, piece of real estate, currency, or other traditional investment, my downside would be much more limited. Because of this, domain name investors need to be certain there is room for their return, and a small profit wouldn’t be enough to risk capital.

Despite the higher returns that are expected / desired, I don’t think domain investments is something that can easily be scaled (if at all). What I mean is that if you find a fund that is bringing solid returns, you can generally invest as much money as you can afford, and the returns will likely remain the same, growing your income quite a bit. With domain investments, it’s not like I can just throw more money at them and expect higher returns with the same risk. The market for great acquisitions is limited.

Over the years, my view on profit (and expected return) has become a bit distorted.

On a sidenote, check out Morgan Linton’s timely blog post. I saw it before I published this article, and I think it’s tangentially related to this topic and worth a read.

Elliot Silver
Elliot Silver
About The Author: Elliot Silver is an Internet entrepreneur and publisher of DomainInvesting.com. Elliot is also the founder and President of Top Notch Domains, LLC, a company that has closed eight figures in deals. Please read the DomainInvesting.com Terms of Use page for additional information about the publisher, website comment policy, disclosures, and conflicts of interest. Reach out to Elliot: Twitter | Facebook | LinkedIn

16 COMMENTS

  1. Another factor to consider is that of a portfolio of 100 domains only a certain percentage of them will sell at acceptable prices in the short run. Reducing the price to reseller value may allow one to generate cash but may result in selling at a loss – certainly not the anticipated result one desired when investing in that domain.

  2. “When I buy a domain name, I am buying it because I think that it is worth more. How much more really depends on the domain name and price I paid, but if I only thought I could sell a domain name for a 10% profit, I wouldn’t buy it.”

    What minimum percentage of profit is desired to make you want to buy a certain domain?

    • There’s no set #.

      The more expensive the name is, the lower the profit margin I would expect.

      If I buy a name for $1k, I probably wouldn’t sell it for $2k (100% ROI), but if I buy a name for $50k, I might sell it for $75k (50% ROI).

      For instance, I bought a name at NameJet for around $800 and I turned down $2,000 the next day after someone saw it on a sales report.

  3. Hi Elliot,

    It might also be interesting to think about how developing a domain name fits into the equation.

    I think that once you go through steps to acquire a domain name, once it is put into development, the expected profit potential can go up remarkably.

    Or, maybe not….

    Thoughts?

    • That’s very different because with development and business building, the domain name is far less important than when you are buying a domain name strictly for its intrinsic value.

  4. It’s difficult to compare domain name investing to passive investments like stocks. Active buying and selling domain names would be more similar to actively trading options. Buying a call gives you the right but not the obligation to buy a stock at a certain price until a certain time in the future. It’s a bet that the underlying asset will increase in value during the specified timeframe giving the owner of the call a profit. If the stock never increases in value, the option eventually expires worthless, much like a domain that is allowed to drop.

    The difference is that in domaining we are essentially buying calls on trends, potential business ideas and catchy business names. If the trend takes off, we sell for a profit. If it dies, the domain becomes worthless.

  5. Well not to scare you or anything but since you’ve gotten into this business things have been as good as they’ve ever been. Prior to 2006 (when you got in?) things weren’t that great (and forget any of the high profile sales that occurred etc doesn’t mean much in terms of what you might do generally).

    I remember a few years (iirc 2001 to 2004) where nothing moved and I didn’t sell much at all (might have the years screwed up a bit but the point stands). Remember it got so bad that I unloaded a 3l .com for way below market.

    Likewise if you are around long enough the part about “if you find a fund that is bringing solid returns, you can generally invest as much money as you can afford, and the returns will likely remain the same”, well, you will see that is not true either. Just hang around.

  6. Elliot, sales question for you…If you wish to share.

    I am curious what % of you sales come from you actively emailing/calling up potential buyers (DIRECTLY)…..vs. folks emailing you or buying thru brokerage? (INDIRECTLY)

    ie: 80-20 (Direct vs. Indirect)
    50-50 ?

    I would imagine you sell higher percentage when you actively seek out customers? But, maybe I am wrong.

    Care to share?

    Thanks,
    Paul

    • It works both ways. I only buy names people are willing to sell.

      The irony with this is there are some people who think domain investing shouldn’t be permissible, but of course when you inquire about some of their unused domain names that have been sitting idle for 10 years, they have a ridiculous and out of touch asking price.

  7. I agree with what Larry said about buying a stock fund, that it is not predictable/safe just because it has been making a good return every year. If stocks are averaging a return of 10% a year, it does not mean they will average 10% a year for the next 5 or 10 years. In fact, many times it is the opposite, in that something that is doing well usually stops eventually.

    As you pointed out, buying a domains has a lot more downside risk then the stock market, so that is why you need much bigger potential returns. And, the reduced liquidity is also a very big factor in that.

    I am not sure I agree with you about the market for great domain acquisitions being limited. You can always just buy higher valued domains and speculate with those (like a $100,000 domain instead of a $5000 one).
    Plus, you can buy portfolios of smaller domains from domain owners.

    The problem with a hypothetical fund for domain investing is that there is a huge amount of risk in it, because it takes so long flip the domains. The revenue stream is very unpredictable since some domains may sell in a month and some in 5 years. And, in 5 years, the domains could be worth a lot less, not because they were bad purchases, but because the domain market in general went down.

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