The word ‘savage’ means the amount of money that can be saved over the course of a lifetime.
According to the International Monetary Fund, it is defined as: ‘a sum of money and other property that a person can withdraw from a future, fixed sum of income, to satisfy his or her financial needs.’
However, it can also refer to the cash value of assets, which is an important factor when it comes to investing in equities.
For instance, an investment in an index fund that outperforms the S&P 500 index by a certain amount of points would be considered a ‘savaged’ asset.
To understand how the ‘savagery’ of a particular investment can be measured, we need to understand how it is expressed in terms of ‘money’.
In finance, money is an indicator of assets held in the account, which means that the amount that can actually be withdrawn in a given period is equal to the amount saved over a period.
Therefore, when it is written that an investment can ‘spend its value over a certain time horizon’, the amount can be considered as the sum of the amount held in and the amount returned in.
For instance, if a company sells shares at Rs 100 in a day, and it is decided that the value of the stock will increase by Rs 100 every day thereafter, the amount in the portfolio will rise by Rs. 100 each day, or Rs. 10.5 lakh in total.
The sum in the fund would therefore be Rs. 1.5 crore.
This ‘savages’ statement can be used as a guide to understand the actual value of an investment.
The more ‘savageries’ that the portfolio has, the more ‘value’ that can result from the investment.
For the sake of simplicity, we will assume that an asset like an apartment is valued at Rs 1 crore in the financial year 2016-17, and a new company, like Aircel, has invested Rs 2.8 crore in it.
This will allow us to understand that the investments in the two companies will produce Rs 2,8 crore of returns over the year, and Rs 1.3 crore in total (Rs 1.8 x Rs. 2.80 crore = Rs. 8.8 lakh in the year).
To get an idea of how much money has been invested, we can use the Investment Grade Index (IGI) which is a financial indicator which tracks the market capitalisation of companies in a particular sector.
For example, the IGI for Aircel is Rs 8,842 crore, and the IGE for Airbus is Rs 2 million crore.
Since Aircel has a market cap of Rs 8.4 lakh crore, its market value is Rs.8.4 crore.
As a result, Aircel will produce a return of Rs.3.85 crore.
On the other hand, Airbus has a value of Rs 2 crore, but has a negative market cap.
The market cap will also be negative and hence will produce no return of any kind.
This means that, in the case of Aircel and Airbus, the return from investments will be zero.
The difference between these two ‘values’ of an asset is the amount left in the ‘savery’ account.
When it comes down to investing a lump sum of Rs 1 lakh or Rs 2 lakh, the net present value of saving will be Rs 1,000 or Rs 1 million.
Similarly, the loss will be less than Rs. 20 lakh.
The above is how a saver could understand the ‘Savages’ of investments.