 Warren Buffett is the world's richest and most successful stock market investor. But he doesn't say that he buys stocks. He says he buys businesses. But how does he decide what businesses to buy? How does he decide what principles to follow? Ben or Benjamin Graham wrote the Bible on what has come to be known as value investing and one of its key principles about stock market investing is actually to ignore the stock markets. Okay, that's a bit of an overstatement but broadly it is true what Ben Graham and others who follow value investing tell you that stock prices go up and down, they fluctuate but the intrinsic value of a stock price actually doesn't change that offer. If you don't go by the market price of a stock, how do you calculate its intrinsic value? Well, essentially you work out what is going to be the overall future earnings from a particular business and then you discount it for inflation and bring it down to its present value divided by the total number of shares outstanding and that is the intrinsic or the fair value of a particular stock. These are complicated calculations and there are various ways to arrive at it and two people can come up with very different calculations using the same method. I'm not going to go into all of that because that's not really relevant to this video. If you're interested, you can actually watch a lot of videos on YouTube or even read many books on how to do value investing, how to value a particular stock. For the purposes of this video, all we need to know is that a value investor takes into account a lot of numbers and comes up with what he or she believes is the fair value of a stock. But just because you now know what is the fair intrinsic value of a stock does not mean you're going to buy it. That is where Mr. Market comes in. And Graham used the example of Mr. Market. Just imagine that when you buy a stock that you bought into a business where you have this obliging partner who comes around every day and offers you a price. Mr. Market gives you different prices on different days. And by the way, value investors say that Mr. Market may take years, decades to actually finally arrive at the intrinsic value or the fair value of a stock. But you shouldn't lose patience in the long run. Mr. Market or market prices will catch up with the fair value of a company's business and its stock price. Except unless in the long run something like this happens. In the long run all of us are dead. But wait a minute, aren't markets supposed to always be able to come up with a fair value of things? Identify the true value of things? Yes, economists do accept that there will be fluctuations here and there caused by temporary increases or drops in demand, temporary increases or drops in supply. But overall, within a short period of time, things will come to equilibrium and the fair value will be discovered by the market. If capitalism really works in that wonderful mythical way, then value investing should just not exist. It would be impossible to beat the market. In fact, that is what some very important economists argue. They say that you cannot beat the market because the market is an amalgamation of all the information that you can have about a particular stock at that time. So you can't beat what the market is giving. Prices reflect all available information. Investing that hypothesis turns out to be more difficult, but it's a simple hypothesis and principle. That was Eugene Farmer. He won a million dollars, not a million dollars actually. He won the Nobel Prize in 2013 but gave him a million dollars. He's a very rich economist and what he says is largely true for most people because most people will find it very difficult to make those calculations to put in a lot of time to identify stocks which might outperform the overall average of the market which is captured with the various indices, stock market indices like Nifty, Sensex, Dow Jones, Average and things like that. So he said just bet on these indices and you'll get the average return of the stock market which you really can't beat or only very few people can beat. And as I said, he got a lot of money because of these theories. He won the Nobel Prize and he's a highly paid economist. But he's not Warren Buffett. Warren Buffett who does not believe that Mr. Market has all the information is one of the richest people in the world. He understands that capitalism is inherently chaotic. That statement is actually bigger than it seems because it tells us that markets are inefficient in identifying what a society really needs. It is inefficient in identifying how people should be rewarded for things which are not just about business. And it is ruthless. It leaves people on the wayside who are unable to compete, who don't have the skills to compete. The market system is brutal and it leaves behind people who are perfectly wonderful people who don't have market related talents. That is what Warren Buffett knows about capitalism, that markets don't really work. Mr. Market is inefficient. But no one ever told you that. You were told that free markets are the best allocators of resources. And that is why Warren Buffett is Warren Buffett, one of the richest people in the world. And you are not. That's the show today. Keep watching NewsClick, like this video, share it as well.