Friday, August 31, 2018

Jeff Bezos and PT Barnum think alike

PT Barnum was right; there is a sucker born every minute.

Amazon recently announced a program that promises massive profits to startup local package delivery companies. It represents that entrepreneurs who participate in its program can earn $300,000 in profit per year. That's certainly an attractive proposition. Their site represents that this is achievable with only a $10,000 investment and an additional $30,000 in liquid assets. That's a heck of a potential return*

Now the math. Let's assume that Amazon is completely honest and you'll make $300,000 in profit each year with 40 vans (but if you dig a little deeper, that $300,000 headline number become $75,000 to $300,000). But let's stick with the best case scenario of $300,000. 

That works out to $7,500/year/van or $21 per day per van... and you take all the risk, you use your capital, and you are liable on the debt. You work 365 days a year, and you can be sure that they expect close to 6 sigma performance.

Amazon doesn't say anything about what happens when driverless vans come around. My guess is that you'll be dropped like a Trump staffer who has managed to piss off Ivanka and be stuck with useless vans and the need to unwind this whole operation. You think this is crazy? Well, Amazon is buying a fleet of aircraft so that it can move business away from FedEx and UPS.

Before rushing into an opportunity that seems too good to be true, think about the risks involved. Economics 101 teaches us that an efficient market will not in the long-run allow someone to earn an above average return without taking an above average amount of risk. Only suckers think otherwise.

*The NPV of an investment requiring $10,000 up front and generating a 20-year stream of profits of $300,000/year increasing 2% annually for inflation and discounted at an 8% discount rate is more than $3.2M.

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