“Passive Income” is turning into the pyramid scheme of our time. Instead of Nigerian princes, you hear more and more about gurus who made X million dollars selling t-shirts on Amazon or Etsy. Even genuine, independent entrepreneurs can find this narrative tempting. Luckily for us, there are easy ways of testing if Amazon can truly offer passive income that leads to wealth. Let’s go down this rabbit hole.
Amazon Sellers vs. Amazon Stock: The Ultimate Test for Passive Income
If Amazon was a truly great passive income opportunity, sellers on the platform should outperform, or at least match, the performance of Amazon stock (or the stock market in general), which is the ultimate passive income generator. If, however, sellers consistently underperform the stock market performance, even though they contribute significantly to Amazon’s success, then selling on Amazon might not be the golden opportunity it is presented to be.
Amazon Sellers Performance Comparison
During the post-2010 period, Amazon stock consistently outperformed the median Amazon FBA seller who reports a 13% annual profit rate according to the most recent industry survey. The stock has returned 25.90% annually, which amounts to a whopping 2,690.85% return for the shown period. The S&P 500 has returned 13.32% annually, marginally beating the reported returns of Amazon sellers. Obviously, this is a simplified comparison based on assumptions such as the constancy of seller returns over the given period. However, the astronomic gap between estimated seller returns and Amazon stock returns cannot be ignored.
Insights into Amazon Sellers Population
It is essential to consider the entire population of Amazon sellers, as the median seller provides only a partial picture. When we compare the reported profits of the whole population of Amazon sellers with the stock market performance of Amazon stock, we find that merely 16.00% of sellers outperform the market.
Tax Implications for Amazon Sellers and Stock Investors
Taxes are an important but often overlooked aspect. When evaluating long-term financial performance, the level and frequency of the tax rate can significantly impact results. In this regard, the stock market has a clear edge over other types of income, such as wage income and seller profits. Financial profits are taxed only when the investment is withdrawn at the end of the investment period, whereas seller profits are taxed annually, or even quarterly in some cases, making wealth accumulation challenging over long time horizons.
Assuming sales profits are taxed annually based on an average Personal Income Tax Rate (15%), stock market profits are taxed at the end of the investment horizon at the same rate (15%), only 14.44% of sellers can beat the Amazon stock.
The Time Value of Money for Amazon Sellers
For a fair comparison, the time value of money should also be taken into account. Working 6 hours a week on FBA translates to 300 hours annually. At minimum wage, that’s an additional $2,100 (assuming a $7 hourly wage) you would “earn” by simply investing your time elsewhere, which would tip the scale further in favor of the Amazon stock.
Risk Considerations for Amazon Sellers vs. Amazon Stock
A perfect comparison is not possible as an accurate measure of risk is not available for either Amazon sellers or Amazon stock. However, the evidence so far strongly suggests that owning Amazon stock is far more profitable than selling on Amazon. Amazon owes its success in “utilizing” its sellers, which most other retailers do not have. Hence, the results confirm what we already know about Amazon.
Conclusion: Is Selling on Amazon Worth It?
While it may be tempting to try selling on Amazon, the evidence indicates that owning Amazon stock is a more profitable venture. However, a financial portfolio highly concentrated on Amazon is a highly speculative idea. A better approach for stock investors is to diversify and/or have a viable exit strategy in case a new technology or a new economic system, such as the Chinese one, wipes out Amazon.
Before diving into the world of Amazon selling, consider the broader financial landscape and your long-term goals. Is selling on Amazon the best use of your time and resources, or could your investments yield better returns elsewhere? Share your thoughts and experiences in the comments below!
