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Why I like to invest in ‘simple’ businesses

We are just starting another round of the Hayne Royal Commission, this time looking at the insurance sector. Already we’ve heard of rule breaking and potentially dodgy sales tactics.

So far Freedom Insurance Group Ltd (ASX: FIG) and Clearview Wealth Ltd (ASX: CVW) have appeared. But we can also expect to hear from Insurance Australia Group Ltd (ASX: IAG), AMP Limited (ASX: AMP), Suncorp Group Ltd (ASX: SUN), Allianz, TAL, Youi and Commonwealth Bank of Australia’s (ASX: CBA) CommSec.

In earlier rounds banks were also hammered in relation to financial advice, with CBA, AMP, Westpac Banking Group (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) facing pressure.

With penalties and compensation becoming increasingly common it has shown me even more that complicated businesses with heavy regulation and capital requirements are not great investments most of the time.

Some investors may think that banks and insurance companies are simple, but underneath they are complicated beasts. One natural disaster or economic downturn could completely wipe them out.

It’s much harder to get to grips with the risks of businesses that are hard to evaluate, which is why I’d rather mostly to stick to simpler businesses like Costa Group Holdings Ltd (ASX: CGC), InvoCare Limited (ASX: IVC) and Paragon Care Ltd (ASX: PGC).

Foolish takeaway

The other thing about the banking and insurance sectors is that they are very competitive spaces and essentially offer commodity-like financial products. I like businesses that have more pricing power than that.

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Motley Fool contributor Tristan Harrison owns shares of COSTA GRP FPO, InvoCare Limited, and Paragon Care Limited. The Motley Fool Australia owns shares of and has recommended COSTA GRP FPO. The Motley Fool Australia owns shares of Insurance Australia Group Limited and National Australia Bank Limited. The Motley Fool Australia has recommended InvoCare Limited and Paragon Care Limited. 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 Scott Phillips.

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