Risk Reduction Part 1 – Only High-Quality Securities

There are four principles of value investing. The first and most important is risk reduction. Risk reduction is the primary key to success with value investing. If done properly, it will ensure annual returns of more than 20% on your investment.

Risk reduction has four key elements; it is imperative to adhere to these elements to reduce risk to an insignificant level. The four elements consist of:

1. Part 1 – Only invest in high-quality securities;
2. Part 2 – Fully understand the industry’s financial dynamics;
3. Part 3 – Only invest when the company has financial depth;
4. Part 4 – Ensure the investment can withstand all time frames of that industry’s economic cycle.

This article, along with the following three articles, provides a cursory explanation of these four elements. Other articles on this site provide a detailed and thorough explanation of each element individually. It is suggested that you conduct the necessary research at the in-depth level in order to fully appreciate the value each element brings to the buy decision model.

It all starts with investing only in high-quality investments.

Risk Reduction – Only Invest in High-Quality Securities

Of the four elements with risk reduction, investing in high-quality securities has the greatest weighted influence regarding loss prevention. High-quality securities refer to securities with strong market capitalization, a long history of performance, and a recognizable product/service. The following explains these three characteristics further:

Risk Reduction – Strong Market Capitalization

Market capitalization is defined as the current price of the security times the volume of units available in the market. It is s simple multiplicative step. For example, McDonald’s Corporation currently has 715 million shares out in the market. The current price (July 20, 2025) is $300 per share. Thus, McDonald’s market capitalization is $215 billion. You can find this value on most financial brokerages’ website pages. For example, here is Yahoo Finance’s presentation page for McDonald’s.

Here, Yahoo Finance states that McDonald’s Corporation’s market capitalization is around $212B. To provide some perspective, Apple Corporation has a market capitalization of approximately $3 trillion. The top 10 market capitalization companies are as follows:

1. NVIDIA                           $4T
2. Microsoft                         $3.8T
3. Apple                               $3.1T
4. Amazon                           $2.4T
5. Alphabet (Google)          $2.2T
6. Meta (Facebook)             $1.8T
7. Broadcom                        $1.3T
8. Tesla                                 $1T
9. Berkshire Hathaway        $1T
10. JP Morgan Chase            $800B

Other reference points are Coca-Cola at $300B, Disney at $218B, and Caterpillar at $195B.

The rule of thumb is that the company should have a market capitalization of more than $5B. This means the company is recognizable by investors and is commonly in the top 1,5000 companies that are United States-based. Typically, the top 1,500 companies have a combined market capitalization of approximately $60 trillion. It is estimated that the entire market capitalization of all US publicly traded companies is around $130 trillion.

One last note, the first company to break the market capitalization of $1 trillion was Apple back in August of 2018. Thus, a mere seven years ago, a company broke through this threshold; today, there are at least nine companies worth at least $1T. For the author, this is troubling because there appears to be a bubble forming with overpriced securities. Several of these are questionable because they don’t have the 2nd required characteristic of a high-quality security – a long history of performance.

Risk Reduction – Long History of Performance

Companies that have been around for several decades over newer/younger companies are preferable when identifying high-quality securities. For example, in the list of the top ten market capitalization companies above, there are two that are less than 30 years old – Nvidia and Tesla. Neither has ever had to address a serious recession or a deep, extended period of reduced sales. Nvidia’s market capitalization has jumped since 2017 and reflects more of a growth-based security than a high-quality security. There is a difference. In effect, of the top 1,500 companies, there are more than 200 that are classified as growth-driven and not performance driven tied to their market capitalization. Nvidia and Tesla are perfect examples of market capitalization investments driven by growth rather than by performance. Examples of performance-based high market capitalization companies include:

Coca-Cola                                               United Health
Traveler’s Insurance                                Walmart
General Electric                                      JP Morgan Chase
Home Depot                                            

There is more to it than market capitalization or performance-based operations; a recognizable project or service goes a long way in maintaining the status of a high-quality security.

Risk Reduction – Recognizable Product or Service

One of the last characteristics of high-quality security is name recognition. When you hear Johnson and Johnson, you automatically think of one of their many health care or household products. Brands such as Band-Aid, Benadryl, Listerine, Stayfree, and Tylenol. All of us have used one of their products and seen the Johnson and Johnson logo.

This name recognition goes a long way in endorsing high-quality securities. Any good investor would immediately jump at the chance to own Johnson & Johnson if the price suddenly dropped. It is a solid company, held in high esteem, and honestly, the name demands respect because of its quality products.

Other examples of name recognition companies include:

Verizon                                                                     Tyson Foods
Disney                                                                      Old Dominion (get out on the highway and you’ll see their trucks everywhere)
Starbucks                                                                  Hershey (chocolate, chocolate, and more chocolate)
Procter and Gamble (Tide, Pampers, & Charmin)                Generac
Allstate (“You’re in Good Hands”)                                                       Dominion Power
Charles Schwab                                                        Delta Airlines

When you have a high-quality product or service, the name goes a long way towards endorsing the company as a high-quality investment. 

Investing in only high-quality securities is more than half of the weighted value of the four elements tied to risk reduction. Make sure the investment has a market capitalization greater than $5 billion. Secondly, prefer performance-based operations over growth securities. Here, the respective investment should have 30 or more years of continuous operations with good earnings. Lastly, pick companies that have good brand recognition. Brand recognition is for products/services that have been around for some time (decades).

To augment high-quality securities, when the investor fully understands the financial dynamics of the industry involved, it provides greater confidence in the company’s ability to quickly regain its former brilliance after falling out of favor with investors. Part 2 in this risk reduction series covers how critical it is to understand each industry’s financial dynamics. Act on Knowledge.