Right now, my biggest individual ASX shareholdings are Pro Medicus Limited (ASX: PME) and Xero Limited (ASX: XRO). I’ve held Pro Medicus shares for many, many years. And, unfortunately, I have a different story to tell for my Xero shareholding. . .
Pro Medicus share price
What is Pro Medicus?
First, some context. You might know that Pro Medicus is the second-best-performing ASX company over the past 10 years. According to Tikr, the Pro Medicus share price is up 16,047% in 10 years. That turns $10,000 into $1.6 million.
(What’s the best-performing ASX share? Pilbara Minerals Ltd (ASX: PLS), which is up 41,483% — that turns $10,000 into $4.1 million… I know, right.)
Okay. Aside from jaw-dropping stock returns, what does Pro Medicus actually do? As I said in my first-ever ‘official’ Rask Invest recommendation, from June 2018, at a price of $7.45 per share; Pro Medicus does two things:
- Provides an ‘all-in-one’ software used in radiology clinics throughout Australia.
- Visage 7 PACS Software
It’s #2 that’s the game-changing product. Here’s how you can think about it:
Jill needs an MRI to determine what’s wrong with her back. She’s feeling a bit rusty. She steps into a hospital’s MRI machine which produces an extremely clear picture. Presto! Unfortunately, the picture is so large that it takes up enough space for 1,000 copies of Johnny Cash’s Burning Ring of Fire.
Traditional “Picture Archiving Systems” or PACS will store these images locally in the hospital (or be printed out) and the images would take seemingly forever to send from one place to the next. Last night’s curry won’t speed this one up.
With Pro Medicus’ Visage 7 and Visage Ease, a doctor taking Jill’s MRI can send the image to the iPhone of a specialist radiologist who is, say, watching their daughter’s basketball game. It can be sent in seconds and Jill could be diagnosed there and then. “Ah yes, it looks like another case of bad taste in music.”
Because Pro Medicus’ software is designed to be run in the cloud, it can charge hospitals for a minimum subscription cost plus a cost per exam/image. What’s more, once it’s installed, it’s extremely capital light / profitable and hard for hospitals to give up.
My ‘cost base’ (the share price I paid) is $7.626. That compares pretty nicely to the current share price of $70.71. Unfortunately, my gain is a measly 826% — plus dividends. An 8-bagger. Not bad. But it’s not 16,000%.
Sounds good. But keep in mind, I’m glossing over the most important points:
- For every Pro Medicus and Pilbara, there are over 2,000 other shares. At Rask, we operate on the belief that less than 5% of shares do all the ‘heavy lifting’ on the stock market — and the academic data backs this up.
- I’ve held PME shares for 5+ years. My Pro Medicus anniversary was 8 June 2023. Most investors — even the smart ones — are absolutely, positively, guaranteed terrible at holding shares for “the long term”. They all say they do — but my best guess is the average fund manager holds shares for less than 6 months! You can probably imagine how hard it is to find an investment that goes up 800% in 5 years. Then imagine owning shares for 6 months! For the record, 5 years still isn’t “long term” in my mind.
- So many people have told me to sell out! If I had a $1 for every “smart” person who told me ‘it’s time to sell Pro Medicus’ I’d have enough to buy the entire company. For the record, I hope to hold Pro Medicus for another 5 years. That said, it shares look very expensive — so I couldn’t tell you for sure that the Pro Medicus share price will be higher or lower in 5 years from now.
- I’ve owned a bucketload of losers. If you plan to ride the rollercoaster of direct stocks, you should know it goes up — and down. Some coasters don’t come back. But that’s okay because with a diversified Core & a smart Satellite portfolio, it’s a bet I’m willing to take time and again. I hedge my bets. And my belief is the 4/10 Satellite stocks I get right will vastly outweigh my 6/10 losers over 10 years.
Xero share price
My cost base for Xero isn’t as nice.
My purchase price was/is $47.586 per share. This means I’m sitting on a ‘tiny’ gain of 152%. Better than nothing, sure. But it should be a lot better. . .
But first, what does Xero do?
Xero is Australia’s largest accounting software provider. While others compete, like QuickBooks and MYOB, Xero is now the default software standard amongst all serious accountants and bookkeepers. Others might use MYOB or QuickBooks from time-to-time but in my experience, it’s only for really small businesses (QuickBooks) or because business owners haven’t been told how much better Xero is for their business.
(It’s worth noting that QuickBooks is owned by Intuit Inc. (NASDAQ: INTU), which is an unbelievable US technology company — I WISH I bought Intuit at the same time I bought Xero. . . I was probably too busy owning Twitter. . .)
Xero makes money by charging a low monthly fee for its “core” accounting software, but is increasingly offering add-on services like HR, payroll and integrations with other tools like Stripe, PayPal, Shopify, Point-of-Sale (PoS) software and similar ones. It’s also hugely popular overseas, in places like the UK, NZ and (increasingly) Canada.
. . .
Okay, back to my journey. I first found out about Xero in 2013/2014. The idea of it got me really excited, even though every accountant told me, “You can’t invest in that! It doesn’t even make a profit” [yet subsequently went on to use the software for all of their clients].
I knew Xero’s software was a game-changer. As the now famous venture capitalist Peter Thiel might say, it was a majorly positive step forward for technology in the accounting profession. And it had already crossed the chasm. . . or shall I say ‘Tasman’ (it was founded by Rod Drury in New Zealand).
Interestingly, even a little bit of research would tell you that the key person behind MYOB (Craig Winkler) sold his stake in his own company to buy 20% of Xero! Talk about insiders making moves.
Let’s think about that. . . it would be like me selling my entire ownership of The Rask Group and putting it all into. . . The Motley Fool or Livewire (no offence meant by this, because I love the Fools and the team behind Livewire!).
Winkler’s decision in 2012 to buy a 20% stake in Xero after selling out of his old business was a major milestone in Xero gaining credibility. At that time, MYOB had only just started to realise Xero’s online subscription-based business posed a huge threat to its then-desktop software-based business. – Business Desk
Some say it was James Bond, but I’m convinced this is where Sam Smith got the idea for his 2015 hit single, “Writing’s On the Wall”.
3 quick lessons from Xero & PME
There are so many lessons I’m happy to share with you in this Saturday’s 2 Sense segment on The Australian Investors Podcast, or at an upcoming Rask Roadshow event. But I’ll double-click on three right now:
- Always maintain a diversified Core portfolio. As good as individual stock stories sound, it’s hard — emotionally and intellectually — to do it.
- Embrace losers — because it’s going to happen whether you like it or not.
- Only ever invest in great companies. Put simply, you do not have enough time, capital or energy to buy and hold mediocre, ‘gonna’ or statistically ‘cheap’ companies for 5 or 10 years. Time heals the wound of overpaying for greatness.
As I referenced in my Pro Medicus research report way back in 2018…
Charlie Munger says:
“Time is The Friend of A Wonderful Business”
Charlie Munger taught Warren Buffett to buy shares in wonderful businesses. Before that, Buffett spent much of his time buying ‘cheap stocks’.
To me, a wonderful business is one that compounds shareholder wealth again and again and again.
While the company’s share price might bounce around from one year to the next, it’s the long-term return from the business that counts.
When I think of a ‘wonderful business’ I think of a few things:
- A business model which has proven itself
- Generates lots of profit for every dollar of sales
- Has loyal customers
- Can grow for many years without buying other companies
