Who creates wealth: promoters or investors? Samira Arora’s tweet sparks debate

Samir Arora was making a case with a formula that is held sacred by many investors.

Veteran investor Samir Arora’s tweet sparked off a small debate on who creates wealth, whether it is created by a company’s promoters or a company’s investors.

It is investors who make companies’ promoters rich and not vice-versa, according to a tweet posted by the founder and fund manager of Helios Capital. It caused a few people to rise in defence of companies’ promoters.

He tweeted, “There is this wrong illusion that promoters make investors rich. Actually it is the investors who make promoters rich.”

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He added, “Promoters are responsible for E and investors decide on P/E. Since speculation, hype, despair reflects more in P/E it is indeed the investors who decide whether to make promoter rich or not.” Where E is for earnings the company makes and P/E is the valuation that the market assigns to the stock.

This is in reference to the formula for P=P/E x E, where P is the price. It is a formula many investors including the Big Bull Rakesh Jhunjhunwala hold sacred.

The post was countered with a few, indignant responses.

A comment stated, “Sir, please don’t mislead retail investors stating that investors make promoters rich. Promoters have to first take risk, put their savings, work hard to earn good growing E for a longer period. After that only investors give multiple to that annual E.”

To this, Arora replied that wealth comes from P/E. He stated, “Question is how much multiple (or P/E). There is difference between being rich and wealthy- wealth comes from multiple, rich comes from earnings.”

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Then another comment pointed out that the promoter has to work hard to maintain the earnings. It stated, “Earnings are to be maintained, he has to work hard, to achieve, so he deserves it na (sic)”.

Arora reposted it with what seemed like a tongue-in-cheek comment: “U have to give credit to the humbleness of twitter crowd. If I say we make the promoters  wealthy, there are so many people trying to defend the promoters.”

He added, “Hats off.”