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Why growth investors are addicted to buying these ASX shares

Software is the new frontier for many of the best investors seeking multi-decade investing returns, with companies like Gentrack Group Ltd (ASX: GTK), Class Ltd (ASX: CL1) and Pro Medicus Limited (ASX: PME) at the top of their watchlist.

Why growth investors are addicted to buying these ASX shares

We all have bad habits we cannot shake. Some people are addicted to prescription meds, others are ‘gym junkies’, love a deck of ‘Winnie blues’ or two bottles of yellow gold Monday thru Sunday.

“Smoking is good for your wealth, says expert”

As terrible as it sounds, some of the most successful investors over the past century have made incredible amounts of money investing in the companies that provide these ‘vices’ to the human race.

For example, as former Motley Fool columnist, Morgan Housel, wrote here, the most successful company in the world is Altria, a cigarette company based in the US.

One measly dollar — around the cost of one ciggy these days — invested in Altria in 1968 was worth $6,638 by 2015. If you put that money in the market, it was worth just $87.

If you had not guessed it already, however, these companies and the investors that stand behind them are often being shamed. 

Conscious investors are voting with their wallet. The most reputable fund managers now exclude things like tobacco, armaments (think: cluster bombs) and pornography from their investing mandates.

The next frontier

What growth investors are now looking towards is the legal equivalent of a vice. They are positioning themselves in technologies that seek to generate huge amounts of recurring revenue and make it nearly impossible for their customers to swap out the product. Their aim is to make their customers dependent on the product. 

These companies are not putting our lives at risk or rerouting our neurological pathways to make us dependent, mind you.  

But their products are good and they know it. These companies offer what seems to be a simple subscription service at a fraction of the cost of doing something repetitive and manual. Happily, you plug in your data and enjoy the benefits … until you want to change provider.

Take, for example, any number of the ASX’s fastest growing tech companies, such as XERO FPO NZX (ASX: XRO), Class or Pro Medicus. These are great businesses, offering great services and are very well run. Because of this, their customers (which include businesses) are highly reluctant to leave.

Foolish Takeaway

From a shareholder’s perspective, those who play the long game with these tech companies are likely to be well rewarded, as customers are compelled to stay on board and soak up the rising prices. That’s why many of these companies currently trade at higher multiples of their profits compared to other companies on the market.

Indeed, so long as the companies are not abusing their position, it makes sense to back some of them for the long term, in my opinion.

I’ve got each of the four companies above firmly on my watchlist.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes and encourages your feedback. You can follow him on Twitter @OwenRask.

The Motley Fool Australia owns shares of Class Limited and Xero. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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