Investing in ASX shares is hard. For every 'best ASX share' out there that might give you stellar returns year in, year out, there are 5 that will only deliver mediocre returns.
Some of these 'mediocre return' companies are amongst the biggest ASX shares on the S&P/ASX 200 Index (ASX: XJO) too. Take Westpac Banking Corp (ASX: WBC). Its share price today (around $25 at the time of writing) is at the same level it was back in 2007. The same can be said for AGL Energy Limited (ASX: AGL), only replace 2007 with 2004 for that one.
Investors who picked up Rio Tinto Limited (ASX: RIO) in May 2008 had to wait until this year to see their pricing positions break even. And Super Retail Group Ltd (ASX: SUL) has yet to break its all-time high from way back in 2013. Now I'm not saying that these companies are mediocre businesses. But their share price performances for long-term investors have certainly been mediocre, and hardly the best ASX shares to own.
It's a good reminder that there are a lot of shares that haven't done all that much for their owners over the past decade or two. It's easy to forget about those kinds of returns if one has an Afterpay Ltd (ASX: APT) or a CSL Limited (ASX: CSL) in one's portfolio. CSL and Afterpay might have both had a rough couple of months. But they are also up almost 150% and 4,000% respectively over the past 5 years.
So how does one pick the best ASX shares like CSL or Afterpay from the ocean of mediocrity out there?
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Finding the best ASX shares in an ocean of mediocrity
Well, let's look at what these companies have in common. Both have managed to form what Warren Buffett might call a 'moat'. Afterpay arguably has 'the brand' in the by now, pay later space, as well as an ability to maintain a first-mover advantage in the space against a plethora of competition. CSL has managed to dominate industries with extremely high barriers to entry in blood medicines and vaccines. Both have been able to compound growth over a number of years, as well as dominate not just the Australian market, but the global one.
All of this adds up to a certain something, a je ne sais quoi if you will, that leads to success. The best ASX shares tend to have something like this. But it's tricky because each business's 'special something' will be different. But if a company can demonstrate an ability to grow and compound revenues, earnings and/or customers over multiple years, that's a good start
