Any stock that goes from 85 cents this time five years ago to $22.19 today to produce a return over 2,500% (or 26x) in 5 years should be towards the top of share market investors' watch lists.
That's exactly what Pro Medicus Ltd (ASX: PME) shares have done and they're starting to make the returns of some of the more popular growth shares look pathetic.
Take a look at the returns of some of the WAAX shares for comparison below.
WiseTech Global Ltd (ASX: WTC) up around 480% since hitting the ASX boards in April 2016.
Appen Ltd (ASX: APX) up around 43x or 4,200% in 5 years from 63 cents to $26.16 today.
AfterPay Touch Group Ltd (ASX: APT) up around 8.1x or over 700% since its June 2017 merger with Touchcorp when it traded around $2.95 per share.
Xero Limited (ASX: XRO) up around 105% from $29.90 in May 2014 to $60.05 today.
The comparisons aren't ideal as some of these businesses have traded for less than 5 years in their current incarnations, but only machine learning business Appen (also at a record high today) is ahead of Pro Medicus.
Foolish takeaway
One lesson from this as a retail or 'mum and dad' investor is that thinking you've missed the boat on 'fast-growing' businesses can be a much more expensive mistake than buying a business that goes bankrupt.
After all the most you can lose on a stock is 100% which is a terrible outcome, but a trifle compared to missing out on returns that can zoom over 1,000% in 5 -10 years.
Psychologically then it's important to remember that past price action in the share market means nothing except over the very short-term.
This is because a lot of traders, robot or human, will track moving averages (momentum) to decide whether a stock is likely to go higher or lower over the days or weeks ahead. This weight of trading (or guessing) in itself can have a small impact on whether shares move higher or lower over days or weeks.
Over the medium term (say 3-6 months or more) though and longer term (1 to 5 years say) it's only business performance that counts as equities are valued on estimates of their future cash flows, adjusted for sentiment that is directly related to performance.
When those estimates of future cash flows are rising, positive sentiment (in terms of the price-to-earnings ratio for example) rises at the same time to produce a multiplier effect that translates into the kind of returns we've seen with Pro Medicus and Appen.
However, you should remember this multiplier effect can work in reverse as estimates for cash flows sink and sentiment plunges to produce huge share price falls.
Therefore these kind of 'growth' businesses should only make up a small part of a balanced portfolio.
Either way, it's important to note in both examples that the market is not concerned with past price action, it's only concerned with valuations (based on future estimates) and future changes of sentiment.
Therefore, as a retail investor we should use past price action only as a guide to what businesses have been performing well and have potential to keep doing so.
That approach and the right psychology in thinking long-term should lead to improved returns.
