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If you love a product, should you buy its stock?

An Apple logo is seen inside the Apple Store in Palo Alto, Calif.

Stephen Lam/Reuters

You can't function without a Starbucks latte. Your iPhone 6S is your BFF. And your Lululemon yoga pants make your derriere look 15 years younger. They're all products you love and know well.

But does that mean the companies behind them are good investments?

The short answer: At least it's a good starting point.

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"On the surface, it isn't a terrible idea to own stocks if you have a good understanding of a company and its products, and have a good feeling it will be successful," says Robert Broad, vice-president with T.E. Wealth in Toronto.

Frequent customers have a good feel for how well a business is run, says Jason Voss, a content director at the CFA Institute in New York, which trains investment analysts.

"I'm an advocate of that approach – knowing what you buy," says the former portfolio manager of the Davis Appreciation & Income Fund, which during his tenure was rated five stars, the top grade, at Morningstar.

"It's my belief, from having done the work for a long period of time, that probably 90 per cent of the job is qualitative assessment, not quantitative assessment," he says. As a customer, you're engaging in "qualitative analysis" of what a firm produces.

Yet knowing whether a business makes a good product and has excellent customer service are by no means the only measurements for investing.

"It's a big jump from going, 'I use an iPhone,' to, 'Gee I'm going to own the business,'" says Larry Sarbit, founder of Sarbit Advisory Services Inc. in Winnipeg.

Many more questions must be answered first.

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"It could be a great product at the particular moment that you're using it, but when you buy a business, you have to be able to look farther than your nose in order to understand what the returns are going be," says Mr. Sarbit, who manages the IA Clarington Sarbit U.S. Equity fund.

"The goal behind it is putting a dollar in and knowing you're likely going to get more than a dollar back," he says.

If you like a company's product and think it may be a worthy investment, the next step is evaluating the business like you are going to be an owner, Mr. Voss says.

"I like to use a helpful exercise that I call 'My cousin Vincent,'" he says. "If your cousin Vinnie approaches you and wants you to invest in a coffee shop, what are the questions you would ask Vinnie before you give him your hard-earned cash?"

This takes the investment out of the context of the stock market and helps non-investment professionals ask more meaningful questions. "Nobody will then ask: 'What's the 250-day moving average price of coffee shops?'" he says.

Instead they want to know how the business will distinguish itself from competitors, what its forecast for sales will be in its first year, and what kind of profits investors can expect.

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"All those 'stock market-like' questions melt away when the investment is framed along the lines of giving money over to a potentially iffy relative," Mr. Voss says.

Receiving clear answers is essential. Anything less is a red flag, Mr. Sarbit says.

"If the answers to these questions are not knowable, then what are you doing investing in the company?" he says. "Then it's a speculative game; you're throwing dice."

Yet even with satisfying answers, investing in familiar companies presents other challenges, too.

"For example, someone working in the oil patch might be tempted to invest too much in energy companies," Mr. Broad says. "While a keen understanding of an industry may lead to discovery, a bigger risk is that this approach can leave you very undiversified."

Potential investors must overcome any bias, too. You love the product, but is the business equally deserving of your investment dollars' devotion?

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Quantitative evaluation helps take love out of the equation, Mr. Voss says. Potential buyers can use the price-to-earnings ratio (P/E), for example, which indicates how many dollars investors are willing to pay for every dollar a company earns.

"The long-term running average for stock in the U.S. is 17," he says. "If something is trading well above 17, there ought to be a pretty good justification for that."

Essentially, investors use quantitative analysis to help ensure that a company's stock price has a reasonable chance to grow, Mr. Voss says. "The sole difference between a great business and a great investment is the price you pay to buy into it."

This kind of evaluation would have proven useful in BlackBerry's heyday.

Many investors bought Research In Motion Ltd. stock (now BlackBerry) eight years ago when it traded above $100 based on the notion that everyone had or would soon have a BlackBerry phone. Its P/E ratio soared above 80.

Yet if they had analyzed its strong but slowing revenue growth – as Apple and Google ate into its market share – they might have been more wary. And sure enough, the company went from market-maker to a bit player. Its stock price plummeted.

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This is just one example that shows how finding good, long-term investments is exceedingly difficult, Mr. Sarbit says. The combination of a company manufacturing a great product but trading at a reasonable price is rare.

"There are only a few good ideas out there, and when you find an extraordinary business and you have an understanding of what its future looks like, you put a lot of money into it," he says.

Doing that takes time, effort and know-how, often more than casual investors will do on their own, Mr. Voss says.

"So if you don't have time to read annual reports and keep up on the business once you own it, then it's probably wise to hire an investment professional to do it for you."

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