Robust Portfolio

Unfortunately, one term that is not used frequently among new Internet entrepreneurs is "robustness." New to the trade, they're eager to buy an expensive, social media website; and then reap the profits once it matures. 

However, what these new entrepreneurs are missing is that the portfolios they construct are often pitifully unable to cope with any sort of blip in the market for buying websites. All it takes is a sharp revaluation of one type of website or a down-turn in an industry they have purchased around—and they suddenly find themselves with a portfolio of low-value websites.

In this article, I am going to briefly overview how you can improve the robustness of your portfolio without sacrificing payoff—that is, how you can reduce the variance of your returns while maintaining the expected value.

Below, we will consider three different methods for doing this:

Method #1: Diversify Along Industry Lines

When an entire industry hits a slump, the price of websites in that industry go with it, as demand for sites in that industry fall. For instance, if a recession hits and the financial services industry contracts as a result, then so, too, will the prices of financial services websites.

This is precisely why it is important to diversify your website portfolio across industry lines. When doing this, you should think long and hard how best to diversify without sacrificing too much freedom; and without pushing yourself too far away from the industries in question.

One quick way in which you can do this is to start by picking 10 relatively unrelated industries. For instance, you might pick the following list:

1. Golf
2. Restaurants
3. Software
4. Automobiles
5. Business-to-Business Services
6. Internet Marketing
7. Bankruptcy
8. Marriage Counseling
9. Diet & Exercise
10. Boating

If you look carefully, you'll notice three important things about the above list. The first is that some of the industries—golf, restaurants, automobiles, and boating—do well when the economy is doing well. Others—marriage counseling and bankruptcy—do well when the economy is doing poorly. And the others do not appear to be strongly connected to business cycles either way.

By taking this into consideration when you build your portfolio, you can hedge against losses that less thoughtful entrepreneurs would could be wiped out by. This goes a long way towards making your portfolio robust.

Method #2: Diversify Across Top Level Websites

Another good way to diversify is to make sure your websites are not concentrated too tightly in any particular top-level website. This is especially true if the top-level website in question is relatively obscure.

For instance, if you construct your portfolio almost entirely out of one-word .info websites, but then a new generic top-level website is released, then all of your .info websites are likely to drop in value, as the same one-word websites become available elsewhere.

It is important to note, however, that .com top-level websites are the exception to this rule and many others. While they will experience slight dips in value in response to the release of a new generic top level website, they'll be much smaller than the ones you'll encounter with a .info or .biz website.

In short, there are no hard-and-fast rules about top-level website portfolio composition, but it is wise to spend time considering whether you are taking on an inordinate amount of risk by pilling up a lot of websites from the same country code or from the same generic top level website. If you are buying and selling primarily .com websites, this is not as much of a problem.

Method #3: Focus on Midrange Priced Websites

Of course, the exact price range you pick will depend on your initial budget and your plans. However, focusing on secondary market websites in the $100-200 is often a good place to start.

Why to Avoid the Primary Market (Usually) for .Com Websites

Unless you come up with a great insight into a website name, purchasing primary market .com is tricky business. It can be done profitably, but it's harder than you might think.

The most important reason to avoid the primary market for .com websites is that the vast majority of them will be worth the exact same amount when it comes time to re-register them 1 year from now. This means that you'll pay twice to register the website, but will earn less than you would have if you had simply held cash.

It is important to note that the primary market is a good place to shop in some cases. In particular, when an event in the news suddenly creates a market for websites on a certain topic, it's not a bad idea to grab a bunch of relevant .com websites to hold onto for a few weeks (or months) and then resell.

Why the Secondary Market is Usually a Better Choice

If you purchase a website that is auctioned for at least $500 (and you choose it well) in the secondary market, there's a good chance that its value will change within a year or two of the purchase date. Here, a 5% increase in value will be sufficient to cover the re-registration; whereas, for the primary market websites, you'd need a full, 100% increase in value to cover your costs.

In addition to this, the bulk of the secondary market is made up of "midrange" priced websites. These are the types of websites that provide that best tradeoff between transaction costs (i.e. monitoring, maintenance, and re-registration costs) and risk (i.e. spreading out risk across many mid-priced websites, rather than few expensive ones). I personally recommend that you construct portfolios almost entirely out of these websites.