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.
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
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.