The best way to beat the market over the long-term is to invest in quality shares that have high profit margins and are re-investing in their businesses.
There aren't many ASX shares that really fit the bill. I think it's important to choose the ASX shares that are expanding well overseas because that dramatically increases the total addressable market.
With that in mind, these three ASX shares could beat the market if you hold for the next decade:
Cochlear Limited (ASX: COH)
Cochlear is the best hearing device business in the world. When one of its devices is implanted in someone Cochlear wins a customer for life and these days that can come with a recurring revenue stream for services.
Why could it be such a good investment over the next decade? Apparently only a small amount of people who have hearing loss have actually be diagnosed and have a helpful hearing implant. This is particularly relevant to potential customers in countries with large populations that are experiencing rapidly-growing wealth such as China and India.
As more people in those countries enter the middle class, they are more likely to spend on the things that will improve their quality of life even further, such as hearing devices or other medical treatments.
Cochlear is trading at 41x FY19's estimated earnings, we'll see this reporting season if that is too expensive.
Xero Limited (ASX: XRO)
Xero is arguably the best cloud accounting software business in the world. The fact that it started much later than its competitors means that it was able to design its software purely for the internet, rather than having to adopt its legacy desktop software into a cloud offering like Sage and MYOB Group Ltd (ASX: MYO).
Xero has very high retention rates, a high gross profit margin and rapidly growing subscriber numbers.
Its superior automation tools and the fact that western governments are implementing laws to encourage businesses to move to cloud accounting mean there are a few reasons why Xero could keep growing over the long-term in Australia and the UK to become the ASX's biggest technology company.
Xero is currently targeting cash flow breakeven whilst it keeps growing its business.
REA Group Limited (ASX: REA)
REA Group is the country's leading property portal business with its realestate.com.au website. Having 'network effects' is great, it attracts the most sellers which then attracts the most buyers, and so on.
Having that market power allows REA Group to steadily increase prices, which increases profit margins. The fact that REA Group's ads cost so little compared to the total selling costs of a house means there's plenty of room for growth over the long-term.
REA Group's international investments in Asia and North America could become very profitable over time as they start generating bottom line profits.
It's currently trading at 30x FY19's estimated earnings.
Foolish takeaway
These three ASX shares are high-quality businesses with long growth runways and high profit margins. At the current prices I'm most attracted to REA Group, as I believe the decline in property listing numbers will be short-lived.
