I just returned from an excellent DomainFest 2011 in Santa Monica. Hats off to the Oversee team who continue to set the standard for the Industry. During the conference I had an opportunity to meet with an institutional investor that is already working with Epik. This Hong Kong based investor has significant pedigree in institutional finance and has now assembled an investment fund with the specific mandate to invest in development-grade domain names. In this post, I discuss the macro view of what I think is going on in the financial markets, along with the implications for domain investors.
The Chinese are Coming
In August 2010, I wrote a blog post entitled “The Chinese are Coming”. Well, I was right. The investment group is Hong Kong based. Hong Kong is in the midst of a massive liquidity bubble and is now also the home of the world’s most expensive real estate — now about 2X of New York City. Many of these investors are now hedging against these inflated assets, including through investment into an expanding array of “Alternative Assets”. The Chinese and Indians, while poorer than Americans on a GDP per capita basis, are in many ways better positioned than their debt-laden American counterparts. In fact, I would argue that Chinese and Indians understand alternative assets better than most Americans.
Asset Managers are getting Domains
What most surprised me about this meeting is that the investment case for domain names as asset class was something that he had already fully grasped. We could quite literally have taken turns with the narrative. I was blown away. At Epik, we often talk about the challenge of explaining domain names as an asset class. When I meet with financial professionals, it usually takes about 10-15 minutes for the light bulb to go on when it comes to the investment case for domain names. In this case, there was no real explanation needed. He got it and was already attacking the opportunity with a team of like-minded individuals who are backed by private investors who are on the hunt for alternative assets. Hallelujah!
Gold and Silver Bullion – You can’t take it with you … and if you lose it good luck finding it!
When investors talk about alternative assets, it is often commodities and, in particular, gold and silver bullion, that is high on the list. While I see no downsides to owning some physical precious metals, I am not a big believer in owning vast quantities of physical precious metals. This is for two reasons: (1) unlike domain names which can be transferred instantly, it is hard to transport physical metals. Airport security is getting tighter — including for private aviation — meaning that taking physical metals with you over a great distance will be easier said than done. Confiscation is a real and growing risk as one traveler learned on a recent trip to Mexico where his 150 ounces of physical gold was confiscated. In this particular example, the confiscation is a factual and provable event. Incidentally, the wife of the ex-President of Tunisia had a similar experience. So you see, gold is heavy and metal detectors are very good at finding it, making it hard for even wifes of tyrannical dictators to make tracks with it. But what if your physical metal simply disappears? How do you even begin to prove that you ever had it, let alone track it down? Right. Good luck with that. Domains on the other hand can without question be traced to prior ownership. Domains can also be pledged, including via UCC filings, clearly establishing ownership and contingencies. Bottom line: with domains, unlike precious metals, if you lose them you can find them!
Telling the Story is everyone’s job
During the DomainFest, I also had an opportunity to sit down with blogger and domain investor, Morgan Linton, who was interviewing industry players for his upcoming video channel, DomainInvesting.TV. I thought this was an excellent example of what I think is everyone’s job, namely educating the public about the merits of domain names as an asset class. We have come a long way but it is truly amazing how many people still don’t get the enormous gap between the price at which one can buy a domain for future development and re-sale. However, to be clear, and as I will explain in the next section, this is not a get-rich-quick story.
Be Greedy when others are Fearful — Be Contrarian and Be Right!
Legendary investor, Warren Buffet, has been quoted that one should “Be greedy when others are fearful”. I believe that is entirely right. There are various other interpretations of the same idea, such as “buy when there is blood in the streets”. This is simply the language of contrarian investors. As Frank Schilling famously showed a decade ago, the single best way to make a fortune is to Be Contrarian and Be Right. I believe this substantially sums up the opportunity for domain investors. Depending on how well you can explain your logic, you may find that your neighbors and relatives think you are a lunatic. However, history has shown that there is a fine line between being a lunatic and being a genius. If you are a Domain Investor, you are a contrarian. I believe you are on the right side of history, particularly as the global economy moves from one which was offline-centric, to one that is online-centric.
The Party is just getting Started
I believe the mismatch in valuations for domain names is absolutely mind boggling. As a result, Epik has been acquiring between 20 and 50 domain almost every day. See EpikDomains.com for a sampling of recent acquisitions. We acquire much of these on the drop but also routinely acquire them from domain investors who have yet to figure out that there is “life after parking”. PPC Parking is gasping for air. The good news about the collapse of parking as an economic model is that some truly amazing names can be acquired inexpensively. To this end, Epik maintains 25 registry connections entirely for this purpose. You can find these gems too. Check out Domains.Epik.com where we publish appraised lists of dropping names every day.
Some Recommended Weekend Viewing
The following video is a decent primer on the near-term outlook for commodities and the associated macroeconomic climate. Nick Barisheff from Bullion Management Group is somewhat monotone in his presentation but content-wise, I believe he got it right:
For those who prefer multimedia, here is the “Readers Digest” version of the same narrative:
The bottom line for domain investors is this:
– Precious metals and commodities generally are not really going up. The Dollar — and effectively all fiat currencies — are losing value. The illusion is that this is a speculative bubble in commodities. Speculative bubbles regress to the mean. That is not what is going on here. You are witnessing the debasement of the fiat currency regime. As more folks wake up to this reality, they will begin chasing more alternative assets — including domain names.
– If oil goes to $200, it would put further pressure on real estate prices. Not only will there be less discretionary cashflow with which to invest, but the entire economic model of driving long distances, e.g. to work at one or more jobs, will break down. The economics of driving anywhere will change fundamentally, particular if this oil crisis lasts much longer than the last one, as I believe it will. The shift to an online economy will be further accelerated.