Can You Maximise Returns While Minimizing Risk Investing In Websites?
Conventional wisdom suggests that you can’t have your cake and eat it too. In the investing world, you need to either choose high returns, or low risk.
If you could find a method that allowed you to have both, everybody would choose that one thing, and then returns would eventually reduce.
While this makes sense, is it actually true? “Conventional wisdom” has been wrong many times in the past.
For those of you who’ve read Ray Dalio’s “Principles”, you’ll know that the system he developed at Bridgewater (the world’s largest hedge fund) was able to find the sweet spot between diversifying an investment portfolio enough to reduce risk, without seeing a significant loss of returns.
So we know that it IS possible to have both these things in the investment world.
The question becomes, is it possible to achieve this when investing in websites?
The first part is easy to answer.
Can websites provide high ROI?
Whether building from scratch or buying an established website, the ROI can be very attractive.
You can buy a site off a broker, not even grow it, and still see 30-40% ROI just by holding it. I’ve mentioned this a lot and I can’t stress the potential enough.
The largest reason for this ROI is because website multiples haven’t yet appreciated enough to lower the returns.
Why is that the case? Because admittedly, website income can go to zero, and relatively quickly.
This doesn’t apply only to risky websites either. White-hat websites, well established brands, all of them can take a hit, especially if they’re not very well diversified.
Just look at the Aug 1 update of 2018 and how many legitimate sites lost significant traffic.
I would also say that some of the price suppression is down to brokers.
Many people would argue that brokers are driving prices up, but I don’t see evidence of this. Every good broker has tens of thousands of buyers on their lists, and only a fraction of the supply needed to cater to that demand.
I know from experience that brokers try not to price websites too high, in order to keep investors interested. If they really wanted to though, I think they could get away with moving the average multiples much higher, and people would still buy them.
Too Much Risk Involved?
So, we know that the ROI of website investing is partially related to the fact that websites are risky. On paper, it doesn’t sound like we can enjoy website ROIs without the inherent risks then.
The thing is, that while the overall risks aren’t going away, they don’t have to apply to everybody in the same amounts, and you don’t have to invest in a risky way (more on this later).
Driving Is Risky Until You Know How
If you’re reading this, and you’ve read our other posts, you already know more than the average investor about the asset class. This means you’re already set up to get better results (read: have less risk) than the average investor.
When you understand what you’re doing and know how to operate a website, you can reduce the risk significantly, even more so if you know how to buy well.
The most obvious place to start when reducing risk, is to simply focus on buying websites that are better quality. You may need to pay a higher multiple (3 years vs 2.5 years profit), but we’ve already established that you have the margin to do this.
In my last post about the sweet spot with growth, I mentioned how you can apply several points to find a website that has a low risk of dying, while still having some room to grow.
That’s why so many people work with us and have us operate their websites in the first place. You can have us run your assets and still achieve a more than satisfactory ROI, while lowering your risk again.
Does the risk go completely to zero? No, but there are other things you can do to reduce it even more.
While websites we buy are much less likely to die than the average person’s purchases, we’re not infallible. To date, we’ve never had a website go to zero, but we’ve had some with performance dips and ROI reduced.
If you estimated that on average, 1 in 5 novice website investors might see their investment go to zero, in our case it might be something like 1 in 50. This goes a great way towards achieving that maximized return with reduced risk, but can we do better?
It would still be terrible to be that 1 person in 50 who has a website go to zero, so how do we eliminate that?
Well, let’s go back to my point earlier where I said “You don’t have to invest in a risky way”.
Actually, it’s pretty simple.
The best way to reduce risk while still enjoying returns, is to operate a portfolio of websites.
At this point you might be groaning and blaming me for stating the obvious. It’s important we took a journey to arrive at this point though, so context is fully understood.
It’s too easy to bandy around sentences like “Portfolios are more diverse” while losing track of what our actual objectives are.
So let’s get back to the point.
We know a portfolio is more diverse, but do we sacrifice profits with a portfolio? And do we need an unrealistic amount of funds?
In short, the answer is no to both.
Running multiple sites certainly may hinder growth to some extent due to a lack of focus, but we’ve already established that growth isn’t a requisite for achieving good returns.
We’re not relying on appreciation in order to make money, as we’re receiving cash flow. Cashflow that can be reinvested into growing the portfolio through adding more sites, or growing existing ones.
So with websites, it’s actually pretty straightforward to have an attractive risk:reward ratio.
Still, I will need to write another couple of posts exploring this further, because it’s not *quite* as simple as just buying multiple sites. If you put $100k into 4 sites at $25k each, it’s more diversified than putting $100k into 1 site, but you’re still having 25% of your portfolio at risk, while adding the extra workload that 4 sites brings.
In those future posts, I’ll explore ways you can get that diversification while potentially reducing costs and workload, and I’ll also cover how to run a portfolio without tearing your hair out; something we have good experience with (even though I seem to be losing my hair regardless).
For now, take heart in the fact that this is an asset class where you can indeed enjoy high returns without necessarily taking on a ton of risk. You just need to approach investing strategically to optimize for both.