January 12, 2011, 7:37 am

6 Buffet Investing Lessons Applied To My Business

by: The Financial Blogger    Category: Alternative Income,Make Money Online
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If you want to make money, I mean real money, one day; you will have to create some sort of side income / company. Unless you work in a very big company and have a very responsible position, your chances of living the good life are minimal. However, if you use your strengths and passion, you can build something that will make your financial life much easier.

Warren Buffet understood this a long time ago and it is why he is one of the richest investors of all time. Along with using his strengths and passion, he also set a number of investing rules that apply to any field of business. Today, I’ll explain how Buffet’s rules of investing is working well with regards to my online company when it comes to buying and selling blogs.

 

#1 Invest in businesses that you understand

I would have a hard time managing an online store as I don’t know much about ecommerce and about managing a store. However, I know how finance works and I know how the blogging world works as well. This is why I am comfortable investing 10, 25 or even 50 thousand to buy a blog; it is simply because I understand the business. Understanding is a big word. In fact, you need to understand a lot of things before you should drop money into an industry. For example, when I buy a blog I understand;

- How the traffic is built (sources, potential, growth)

- How I can maintain and increase it

- How money is made

- How I can increase the revenue

- The link between a specific blog and others

#2 You must buy a company that has excellent management

When I consider buying a website, I look for a blogger that always took care of his reputation and considered his readers. You don’t want to buy a spammy website or internet properties that are on the line of what’s legal. You look for blogs that have been carefully managed and that demonstrate sustainable growth over time. You do not want to buy a “one time high” website that doesn’t shine anymore.

#3 Look at their financial statements, is it a sound business?

This is probably the hardest part to do in my type of business as most bloggers or website owners don’t have financial statements for their internet properties. Some bloggers keep track of their income (especially when they think about selling) but most of them literally ignore their expenses. Obviously, there are not many expenses (unless they have a bunch of writers or they pay for advertising). Therefore, you have to estimate their expenses based on your knowledge.

The revenue details are very important though. You want to make sure the website is:

A) making a profit

B) making sustainable profit

C) making profit that is not driven by spam or other “on the line” approaches

#4 Ignore the market noise

Most people tell me I’m crazy when I tell them I buy blogs in the low to mid 5 figures range. They tell me that I buy nothing but thin air. Then I smile back and shut up… I actually don’t talk much about my business with my entourage anymore. It helps me avoid the “market noise”. When you tell people about your project or business, sometimes they will tell you that it’s a bad idea or that it’s not possible because:

#1 They don’t understand what you are doing

#2 They can’t do it themselves, therefore they think it’s not possible

This is exactly the type of noise that brings down your motivation and make you doubt your good ideas. Then, you have 2 options:

#1 Argue with these people to show them that they are wrong (useless and a big waste of time and energy)

or

#2 Just don’t say a word about what you are doing and simply answer “I’m doing fine” when being asked.

#5 Avoid unnecessary risks (leverage, etc)

All right, you get me on this one. I don’t necessarily follow Buffet’s investing rule on this one. I’m a real cowboy; I like to take risks. Fortunately for me, my partner is more reasonable than I. However, it didn’t prevent me to remortgage my house back in 2009 to buy website properties ;-).

While not increasing your risk is a good thing, I think that you can grow much faster by leveraging. The key is to know when to stop and never borrow what you can’t pay back via your other sources of income (e.g. do not count on your project to pay back your creditors. You need to be able to pay them back by your own means).

On the other hand, I agree that if you are about to buy your first website, you don’t want to remortgage your house to do it. Leave leveraging to professionals… hahaha!

#6 Buy only at very reasonable prices

That’s the best part about buying web properties; since the market is inefficient for web properties you can ensure you are buying at a very low price. You may seem to pay a high price compared to the current market but when you put it into a business perspective, web properties are bargains!

Some people may think that buying 3-4 years the yearly income is too much. I thought so too at one point but this has become the new industry standard (it used to be 12 to 24 months). But when you think of it as a business perspective, which kind of business can you buy for such a low ratio?

Final Thoughts on Buffet and I

I’m far from comparing myself to Buffet but I can tell you that this man truly inspires me. I guess the secret to grow any kind of business is to do as Buffet did: establish a clear set of investing rules and follow them.

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Comments

I like the thoughts here. I’ve been a huge fan of Buffett (as most people are) but I try to follow these with my investing. I suppose I stray from it every now and then, but only buying what you understand is probably the most valuable takeaway and best safeguard against loss, IMO.

It sounds like arguing about buying blogs is about as useful as arguing in the comments on a blog post :)

Buying blogs can be a good opportunity because it takes a certain amount of knowledge and looking around just to find them – less competition means better prices for the investor, although you can still pay too much with no competition.

It’s important to make sure it’s something you can work on; I bought a website a few years ago but had no interest in what it was doing and let it decline until I barely got back what I put in (not counting the time I spent on it).

The final rule is to make these rules fit your situation – copy the rules, not the way they are practiced. They could be applied to any type of business or interest with business potential, not just blogs.

If people don’t want to sell, you can argue all your want, but you’re wasting your time.

I work for a company owned by Buffett’s Berkshire Hathaway and reading these rules, it’s clear he wanted to acquire the company because we fit all of these criteria.

[...] Financial Blogger gives 6 Buffett Investing Lessons Applied To Business. I love a good Warren Buffet post. His principles are universal and can be applied just about [...]

Great points! I think that the first point you make, about investing in businesses that you understand, is crucial.

[...] 6 Buffet Investing Lessons Applied To My Business Around these parts, the name Buffet only brings one man to mind. He is one of the worlds most brilliant businessmen and there isn’t much luck behind his success. There are far more than just six lessons we can learn from him, but this is a start. [The Financial Blogger] [...]