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You Love the Brand, but Should You Buy the Stock?

By Scott Westcott

NEW YORK (MainStreet) -- For years now, Evelyn Cashen has loved Plato's Closet, the retailer that sells "gently used" brand-name clothing to young adults and teens. When Cashen shopped there, she'd often make a mental note to buy the stock in Plato's parent company, Winmark Corp. (WINA). In fact, she made that same note for three years - during which time the stock tripled in value.

"I thought it was a great business model, I love shopping there, but I never took the plunge," says Cashen, 26, an account executive for Leverage PR in Austin, Tex. "Suffice to say, I regret that."

Cashen faced a common investor dilemma - whether and when to buy stock in the brands she loves. Financial experts and fellow investors say that developing a brand-based strategy can be a profitable investing tactic, but they also caution there are potential pitfalls to focusing too much on buying stock in the stuff you also love to buy.

Here are some things to consider before purchasing stocks of your favorite brands.

Diversify, diversify: By its very nature, buying stocks solely based on brands you love threatens to make your portfolio top-heavy in certain sectors. After all, while you may love and invest in Starbucks, Apple, Banana Republic and Ford, that doesn't provide you with exposure - and opportunity -- in oil & gas, utilities, bio-tech, manufacturing and foreign stocks, for example.

Elle Kaplan, CEO and founding partner of Lexion Capital Management blames "the common trap of familiarity bias" for portfolios that end up hyper-focused in one sector. "Instead of following the urge to simply go with what you know, remember that a healthy portfolio is a diversified portfolio," Kaplan says. "Your portfolio should include a range of global equities, fixed income and commodities."

Check the fundamentals: Simply loving what a company produces, the way they do business, or how they make you feel, does not a sound investment make. Sometimes when a company's products are in big demand, they fall behind on production -- hurting their bottom line and, potentially, their reputation. And a company highly focused on competing on price may offer great, affordable products, but suffer from slim margins and sluggish stock returns.