The cofounder of $300 billion private-equity behemoth Apollo outlines 4 mistakes the average investor makes - and explains how he takes advantage

• Apollo Global Management cofounder Josh Harris told the audience at CNBC's recent Delivering Alpha conference that many of his firm's opportunities are rooted in four main mistakes made by investors.
• Harris detailed several of those mistakes, and outlined how Apollo has taken advantage and enjoyed returns based on them.
• Apollo has more than $300 billion in assets, including $77 billion in its private equity funds.
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To hear him tell it, Apollo Global Management cofounder Josh Harris wouldn't have much to do if investors didn't make some basic mistakes.

Harris told the audience at CNBC's recent Delivering Alpha conference that much of Apollo's success can be attributed to those errors because they depress the value of companies that are appealing, or aren't far away from success. That gives Apollo a chance to buy those companies at very appealing prices.

Harris said that, overall, companies on public stock markets trade at double-digit multiples compared to their respective EBITDA, a critical measurement of how profitable that company is. But Apollo's last fund was made up of companies it acquired for just six times their EBITDA over the last three years.

Why was the fund able to pay a price that low for promising companies? Harris offered several reasons.

1) The average investor struggles to analyze complicated companies

The most critical may be that the public is reluctant to back businesses that are complex.

"We've been able to buy great companies really well, really cheaply because they've been misvalued by the public markets because they don't fit in a box," he said. "If you don't fit the box in the public markets, you can't raise money."

As an example he mentioned Smart and Final, a company Apollo bought in June for $1.1 billion. He argued that investors weren't sure how to evaluate the company, which included both a warehouse-style grocery store and a food-service business.

"More and more, the public markets are suited for simple companies' growth, things that are easy to understand," he said. "We were able to buy it at six times cash flow."

Harris said Apollo will probably break Smart and Final into two companies, and has high expectations for both divisions separately.

2) The average investor gets too psyched out by the prospect of industry disruption

He added that a second factor seemed to make Wall Street nervous about Smart and Final during its short run as a public company. That was the threat of Amazon and other companies upending its business. While that phenomenon is undeniably real, he suggested investors are too cautious about some companies exposed to it.

"What we're finding is that if anything has a hint of internet disintermediation, if it's complicated, we can buy it," Harris said.

3) The average investor is too focused on the near term

He also took aim at short-termism, saying investors often overemphasize traditional measurements like quarterly earnings targets, and along the way they can miss out on the greater potential of a business.

"If you have a long-run strategy, you need to invest, you need to build a plant, you need to grow, and you might have to your earnings might have to go down first," he said. "We own companies for five to seven years or even longer, typically and so you can take that longer-term point of view."

4) The average investor is too scared of debt

He added that investors are also more averse to leverage than they should be. Properly deployed, leverage can enhance a company's growth and get it a tax break - but investors' shyness around it means companies that borrow or need to borrow can get punished.

"There are many, many companies that make sense for private equity where private equity will afford them the opportunity to grow," he said.