You Can Beat This Patently Absurd Trading Machine

If you developed a unique trading method that all but guaranteed profits if done properly, would you want to share it? I wouldn't. I'd keep it all to myself.

Not IBM (NYS: IBM) , which recently got a patent on a proprietary high-frequency trading strategy. IBM already offers technologies that help trigger-happy HFT operations shave those last microseconds off their trading times, so this might seem like a logical extension for Big Blue, and a dangerous advantage for HFT firms.

But it's just as likely to be harmless. Bear with me and you'll see why. I'll even let you in on some alternatives that won't force you to chain quants and coders to supercomputers for a tiny edge over Goldman Sachs (NYS: GS) .

Our lips are sealed
HFT is really nothing more than plucking nickels out of thin air with the help of computers, making far more trades every day than any human possibly could. Every unique advantage counts. That's why Goldman had one of its former employees prosecuted in 2009 -- the company was terrified he might have taken its HFT software.

Now, let's imagine for a moment that not only had this employee pilfered its precious algorithm, but sold it to every other HFT trading desk in the world. Suddenly, everyone would be grabbing for the same nickels at the same time. Granted, most existing HFT operations wouldn't want a used algorithm. But each firm that decided to run it would have made things less effective for Goldman.

So why would any company want to announce to the world, through the U.S. Patent and Trademark Office, that it's come up with a new way to pluck nickels -- especially if that company has been on the absolute bleeding edge of computer intelligence for decades? What's the point of patenting something that no sensible trader would ever reveal to the public?

There's two ways to view this, in my mind. IBM is either not sure enough about its strategy to keep it a secret, or the company is so interested in being an HFT technology vendor of choice that it's willing to give out licenses to make money, in spite of the obvious likelihood of diminishing returns.

You can fight back
What can a flesh-and-blood investor do against the onslaught of relentless machine trading? Short of getting chummy at a HFT happy hour (I am not making that up), you can still choose some great stocks the old-fashioned way by keeping your eye on the long term. One way to beat machine intelligence is to use aggregated human intelligence via The Motley Fool's CAPS. We meat bags (as Bender would say) can look at possibilities in intuitive ways computers can't.

With that in mind, I'd like to present three stocks that you can use to fight back. All have earned a five-star CAPS rating (the highest), have outperformed the Dow, and appear poised for long-term success. Did I mention the dividends? There are some pretty sweet dividends, too.

Kicking some shiny metal --
Without further ado, here are the three choices:





Brookfield Infrastructure Partners (NYS: BIP)




Terra Nitrogen (NYS: TNH)




Southern (NYS: SO)




Source: Yahoo! Finance and Motley Fool CAPS.

I include beta ratings because I've found that HFT tends to target high-beta stocks more often. It's not a hard-and-fast rule, but worth your consideration if you don't want to compete against the algorithm. Hefty dividends have helped this trio beat the market, in each case by quite a bit. I'm confident that all will continue their winning ways, and have either made or will maintain bullish CAPScalls on each.


Terra Nitrogen Total Return Price Chart by YCharts

Good stocks for meat bags
My fellow Fool Selena Maranjian recently offered a great rundown of Brookfield Infrastructure's strengths and weaknesses, and gave it a thumbs-up. Brookfield's well-diversified, which is great news for anyone seeking stability. With that kind of price appreciation, it might be well worth it to learn how to jump through a few tax hoops related to its status as a publicly traded partnership.

Terra Nitrogen is part of an elite group of fertilizer stocks with superb margins, which combine with its MLP status to help keep that dividend dialed up to 11. There's plenty of reason to expect a strong year for the agriculture industry, but investors should be wary of any sudden drop in corn prices. Corn's a bit off all-time highs, but the last time it suffered a significant decline came smack in the middle of our most recent recession. If you're not the eternal pessimist looking for a charging bear around every corner, Terra could be a great addition to a dividend-rich portfolio.

You won't find many dividends more stable than a utility's. Southern got the nod from two of our analysts, earning a place in Jim Royal's World's Best Dividend Portfolio and Dan Dzombak's high-yield portfolio. Southern has a potential location advantage over other utilities as well -- most of its largest serviced states are in the top third for projected long-term growth rates to 2030.

Foolish final thoughts
You can boast great returns without any computer's help by selecting the right stocks from the start. If you're looking for other top-notch investment opportunities that can help you trounce those algorithms, take a look at this brand-new free report on another trio of stocks that can help you retire rich. As in my list, there's enough variety for multiple investment styles, and it's perfect for intelligent investors who only want a piece of the best. Click here to find out more.

At the time thisarticle was published Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter for more news and insights. The Motley Fool owns shares of IBM and Brookfield Infrastructure Partners. Motley Fool newsletter services have recommended buying shares of Southern, Brookfield Infrastructure Partners, and Goldman Sachs. Try any of our Foolish newsletter services free for 30 days. 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.

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