Why You Should Consider Investing in Websites

investing in websites

In a previous post here on MoneyStepper, guest blogger Pauline talked about the benefits of buying a website vs. starting a website from scratch. To give you a broader idea of why you might want to buy a website, George from Wired Investors shows the potential returns from buying websites to the returns on more traditional asset classes like stocks and bonds.

 




 

The Current Investing Environment

If you’re already someone who knows about managing your money and investing in general, then you’re probably not all that happy with the current investing climate. Good opportunities to deploy your capital are rare – bond yields are pretty much as low as they’ve ever been due to historically low interest rates, and stock valuations in the US have run up over the past 5 years are above historical averages.

While there is potentially fertile ground in Europe, or in emerging markets, both of those options carry significant risk – right now, nobody really knows what’s going to happen in the Eurozone, and emerging markets are always a bit of a risky proposition, especially if you’re not  already familiar with the market.

The real estate market also looks relatively unattractive – prices have mostly recovered from their 2008 lows, and while there are probably individual towns and cities where the risk/return still looks attractive, those are hard to find unless you’re already a local who lives near the area.

In this rather infertile investment environment, opportunities are few and far between for a smart investor to make good returns. I would argue that now is the right time for savvy investors to start looking into buying digital assets (websites) as a form of investment.

 

My Own Experience with Website Investing

Before I make the broader case for why you should at least consider investing in websites, let me talk a little about my own experience.

About 7 months ago, after having worked a few years in the Finance industry, I decided that where my life was heading wasn’t where I wanted it to go – and I made the tough decision to exit the world of gainful employment in favor of trying to start my own business. I packed up my stuff, moved to Vietnam (from Hong Kong, where I grew up), and decided that I was going to at least give myself a shot at the life I wanted to lead – one where I could live anywhere, have control over my own time, and most importantly, not be beholden to a boss or a company for income.

It was around this time that I stumbled upon the idea of buying and selling websites. At first I was skeptical (as one should be when one is confronted with newfangled investment ideas). On the other hand, I figured that some of the listed websites weren’t that expensive – so why not give it a shot and see if it was for real? I started reading a lot about all the aspects of managing websites – I read about SEO, CRO, PPC, and other acronyms that you might not be familiar with. I ended up buying my first website around the end of last year – and thank god I did.

Since then, I’ve bought 2 more sites, and the first site that I bought, which is also the one that’s performing the worst, is on track to return about 63% this year. My best performing site, which I bought in February of this year, will have recouped all of my initial investment at the end of this month – that’s a 100% return over 4 months.

These are the kinds of returns that are possible with website investments.

Now, don’t get me wrong – I’m not an overnight millionaire – the three websites that I’ve bought were all relatively inexpensive. Also, this is not any kind of get rich quick scheme. While anybody can go to a marketplace and buy a website, doing it well requires time and effort, and more importantly, a willingness to learn the requisite skills.

My main point is this – investing in websites requires a specific set of skills that relate to online business as well a sound understanding of general investing principles – but if you have both of these skillsets, the returns on these digital assets can be far better than more traditional asset classes, especially in this tough investing environment.

So, how is it possible that websites can make such good returns?

It boils down to one thing…

 

On Average, Digital Assets are Grossly Undervalued

Because the mainstream investment community isn’t aware that this market exists, and the inherent risks involved with buying websites, digital assets as a whole are undervalued.

On average, reputable website brokers sell sites for between 20x and 35x monthly earnings. Compare this to the current or historical PE ratio of the S&P 500 (about 20x and 15x annual earnings respectively). Immediately, the difference in price between the two assets classes is stark.

20x monthly earnings translates to a PE of about 1.67x In stock market terms. So on average, websites are 8 to 10 times cheaper than stocks for the same amount of earnings.

Now, let’s make a comparison to bonds. Right now, due to historically low interest rates, bond yields are incredibly low. 20yr AA Corporate bonds are yielding less than 5% a year. If you buy a website at 20x monthly earnings, that translates to an annual yield of about 60%.

Here’s a table I made that demonstrates the extent of this undervaluation

Asset Class Source % Yield
US Equities (S&P 500) Wall Street Journal PE 20x -> Earnings Yield of 5%
20 year AA Corporate Bonds Yahoo Finance 4.42%
US Real Estate RealtyTrac 9.04%
Digital Assets Empire Flippers 20x Monthly -> Annual Yield 60%

 

Now, all of this information may sound a bit too-good-to-be-true. I understand your skepticism – I felt the exact same thing when I first came across the idea of digital assets. Hold on to that skepticism, but continue reading. I admit the comparisons that I made above are not totally fair, mainly because there are a number of risks that are specific to investing in websites that you don’t often come across when investing in other asset classes. I’m going to go these risks in detail, but first, I’m going to define exactly what a digital asset is, and how they make money.

 

What exactly is a digital asset?

A digital asset is more or less any website that generates revenue. Think back to the websites that you frequent – chances are, most of these websites are making money in one way or another. The Gawker Media network of sites made $6.7 million collectively – essentially, Gawker Media owns a portfolio of revenue generating digital assets. Now, obviously these websites are huge, but essentially that’s what a digital asset is. The only difference is that the Gawker set of sites are doing it on a large scale.

There are a number of ways that sites can make money. Here a few of the most common:

  • Advertising
  • Affiliate Offers (through large sites like Amazon, or through individual companies)
  • Storefront/dropshipping (less common nowadays)
  • Ecommerce
  • Selling a unique product or service (e.g Software as a service)

Generally speaking, any business that is inextricably tied to a physical location would not be considered a true digital assets. Barnes & Noble’s online book store relies heavily on the B&N brand name, which in turn relies on their brick & mortar stores – so I wouldn’t consider barnesandnoble.com to be a digital asset. One of the upsides of owning a digital asset is that it is largely independent of your physical location.

Digital assets are also sometimes referred to as web properties, web assets, or digital real estate – the jargon hasn’t formally been set yet because so few people know that the asset class exists. Sometimes, people confuse investing in websites with investing in domain names – domain names are the actual addresses that you can buy (e.g www.ABC.com). When you’re buying a website, you should receive ownership of not only the domain name, but also all the content of the site, as well as other related things like social media accounts or subscriber lists. While buying and selling domains can also be profitable, it’s more speculative in nature – domains aren’t normally revenue generating assets, whereas websites can be.

 




 

What Are The Risks?

You should know this upfront – investing in websites is inherently riskier than other forms of investing, and it also takes more time and effort. While it’s certainly possible to achieve great returns, it’s also possible to lose your whole investment, especially if you don’t do good due diligence or if you don’t know how to properly manage a site.

It’s not as easy as going to a broker and clicking the BUY button.

Here are some of the risks that you should take into account if you’re thinking about buying a website – whenever you’re investing your hard-earned money, it’s important that you understand the risks involved, so I urge you to read the following section thoroughly

  • Owning a website is not a purely passive activity, no matter what the sales blurb on the website listing states. At a minimum, a website typically requires an hour or two of work a month, and that number can be higher depending on what type of site you buy – for example, ecommerce sites will typically require more time and attention than sites that make money from ads.
  • Other than time, website ownership also requires specific skills. You should at the very least understand the basics of website management. You should know how to use WordPress, how to setup hosting and how to receive a domain name from a seller. Also, you should at least have a basic understanding of Search Engine Optimization and Conversion Optimization. These are the basic building blocks of doing business online.
  • Before you buy your first website, you should understand the due diligence on websites is different from due diligence on equities or other investment products. While the goals of due diligence are similar (you want to find out what’s real, what’s exaggerated, and what’s just plain untrue), the methods are quite different. If you’re not willing to put in the time to learn how to do due diligence properly, then you should give up on the idea of investing in website. You can read more about doing website due diligence here).
  • Always remember that the website market is unregulated, and there are a huge number of scammers out there. Thankfully, most of the scams are pretty obvious once you know a little bit about website due diligence. Still, if you do get scammed, you’ll have virtually no recourse – the government will not back you up, and it’s unlikely that you’ll be able to pursue legal action since many deals occur across borders. This is why learning proper due diligence is absolutely essential to success is this arena. Buying through a reputable website broker will protect you to some degree, but never forget that you’re ultimately responsible for your own investments – so don’t take shortcuts and invest properly.
  • Websites don’t necessarily have the longevity that some other assets have. For example, if you buy stock in a major company, chances are that the company will still exist in 10 years – and while there are many websites that will survive and continue to make money over 10 years, there are also many websites that don’t. The longevity of a website depends mostly on what kind of site it is, as well as how you manage it.

Hopefully that list of risks hasn’t scared you off the idea completely – while the potential risks are real, you can also think of them as barriers to entry. Once you acquire the right skills and you get good at picking the right websites to buy, all of the risks above are essentially hurdles that first-timers need to jump over – these risks deter buyers and on a macro level, they pull down average prices in the digital asset market.

 




 

How You Should Think About the Market for Digital Assets?

Imagine you were an investor interested in investing in an exotic country. The prices of companies in this country are low, and the returns are good, but the legal system is unreliable and opaque and the accounting systems are completely different to what you’re familiar with.

That’s exactly how you should treat the market for digital assets. Treat is as an entirely new investing environment, learn the best practices, familiarize yourself with the systems involved, and tread carefully. The only real difference between investing in websites and investing in an exotic frontier market is that in most frontier markets, you need special legal permissions to invest – but in the market for websites, there’s a level playing field, and everybody has access to it.

The market for digital assets is like the Wild West. While there are great risks involved, there is also great opportunity, but only if you proceed with discipline and caution. Those who do it recklessly will end up regretting it, and those who do it properly will be rewarded handsomely.

 

Learn More about Investing in Websites

Here are some useful resources for people who’re interested in learning more:

 

Author Bio

George is a website investor and writes about website investing, due diligence, and earnings optimization at WiredInvestors.com. In a past life, he was a trader at an investment bank, but nowadays he spends most of his time in coffee shops browsing reddit whilst he should be working!!

 

4 thoughts on “Why You Should Consider Investing in Websites

  1. To me, owning a website is more like running a business and less like an investment. When I think of investments, I think of parking my capital somewhere and letting the yield roll in while someone else does the work.

    With website investing, you will normally be stuck with the burden of keeping everything running smooth!
    Derek at MoneyAhoy recently posted…Best Disney World Money Saving TipsMy Profile

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