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"Only two things are infinite, the universe and human stupidity, and I'm not sure about the former."

- attributed to Albert Einstein

Here we are once again at the beginning of a new year. One thing I have learned over the years: Change is the only constant. But some things, such as foolish human behaviour, don't change and seem to be stubbornly set in concrete. Here's one example from the world of investing that I really have trouble grasping.

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Having talked to dozens of successful private business owners in this country over the years, I have found they generally display a few consistent cognitive characteristics when talking about the operation of their business. Yet, when they invest in the stock market, it is almost as if they have completely lost their senses. As owners they are rational, logical and business-like; as investors they are ruled by emotion and irrationality. So while they have succeeded as private owners, many have failed as public investors. My conclusion after being in the investment business for so long: Public and private owners are not just different; they are opposites. Armed with this foreknowledge, I believe there is opportunity. Let me explain further.

When evaluating a business decision, the first question out of a successful private business owner's mouth is, "How much can I lose?" The downside is the first thought on their mind, no matter whether it be investing more in their present business or buying someone else's assets. This approach, this question is the first step private business owners take to avoid capital loss. They have learned that the first step to being a winner is, most importantly, not being a loser.

The private winners generally operate in businesses they know well. They purposely avoid ventures or actions where they think they have a great chance to get themselves into a pile of trouble. They know as much as anyone can about their business: the economics, the competitors, the changes. They've seen it all over the years.

What about their buying and selling behaviour? They know a bargain in their line of business when they see one. When their competitors are in trouble, they are only too happy to buy them out (at a discounted price, of course). Likewise, they are aware of the value of their own business. There are rare occasions, however, when a buyer shows up and offers an outrageously overvalued price to buy their company. The owner's response will be based on their knowledge of the current value and long-term prospects of their company. The owner is no fool: A rational decision is usually the outcome.

Business owners don't compare themselves to the S&P 500 to gauge their returns. If they lose money, that's not good, period. The last thing an owner would do is celebrate that their loss was less than the S&P 500's. In their minds, that would be ludicrous.

How about the time involved in owning their business and the returns? The clear majority of business owners are involved in their businesses for years, decades, or from generation to generation. In most businesses, there are good years and bad. Economic cycles come and go. Of course, they take care of the day-to-day issues, but they generally have some longer-term vision of where they want to be in three to five years. And they can look back to a time when they began as a fledgling start-up.

Another important distinction: How many companies do they own and operate to achieve their wealth? In my observations over the years, business owners have built wealth in one business; two or three at the most. They know spreading their efforts over the operation of multiple businesses is a recipe to lose wealth. There isn't enough time and energy to know many businesses and operate them successfully over time.

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In short, they get it. They really are the model for a successful investment strategy – private or public.

Now to the opportunity I mentioned earlier.

What I find fascinating and disturbing is that so many private business owners don't apply their successful methods to the world of investing in public companies. They have forgotten the behavioural characteristics that made them successful business owners. They join the investing "herd," demanding quick rates of returns and dumping the stock or mutual funds when their expectations aren't met. Many panic and dump these investments when they drop. And they know virtually nothing about the companies or mutual funds they own – the opposite of their own company.

Everything they have learned as successful private business owners gets thrown out the window. In short, they apply a completely different set of standards and behaviours to stocks that they have used so successfully as private business owners. Understanding why they see the world of investing in this completely contradictory way is beyond my skills set; that's one for the psychiatrists.

Our duty as investors is to make money and take advantage of others' shortcomings. When these successful business owners – or the public in general – behave as emotional participants in the stock market, our task is to take advantage of their irrational behaviour and buy the bargains they seemingly can't wait to give us.

As Mr. Buffett has said, without such people he would be walking around with a tin cup.

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Larry Sarbit is the CEO and chief investment officer at Winnipeg-based Sarbit Advisory Services. Mr. Sarbit is a sub-adviser on three funds for IA Clarington.

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