How to Compete in an Increasingly Robotic Market

We’re in an age where we’re being told Artificial Intelligence (AI) is on the brink of taking over the investment management business.

“Specialize.” That’s what an entire segment of Wall Streeters are now being told. “Up your technical education! Increase your skills! Learn to code! Find a niche where technology can’t replace you!”

These days, however, there appears to be no limit to what robots and artificial intelligence can do …

AI “bots” are already defending drivers against traffic tickets, and winning. It won’t be long before they can try all kinds of legal cases, and so much more. Things like diagnosing illnesses, writing songs, architecting buildings, driving our vehicles and, yes, even investing our money.

Here’s a cartoon that — to me — says it all…

Everywhere I look, I see stories about how quantitative analysts are the new kings of Wall Street.

These “quants” are simply traders and institutional money managers who rely mostly on math to make investment decisions. They program computers with their complicated mathematical models, so the machines can price and trade securities.

Quants, basically, take the human element out of managing investments.

This kind of computer-driven trading is nothing new. But the amount of money they put to work is so massive that JPMorgan Chase & Co. (JPM) suggests that discretionary investors only account for about 10% of trades these days.

I don’t know about you, but the thought of having some kind of “R2-D2” (of “Star Wars” fame) investing my money is … and should be … terrifying.

I’m the editor of the Safe Money Report newsletter. And, as the captain of the Safe Money ship, I say, “Not so fast!” to those promoting a robot revolution in finance.

So today, I’m going to tell you why you need to pay attention to the bots.

And, more importantly, I’m going to tell you how you can turn the tables on them by following some simple principles.

The Rise of the ‘Robos’

If you have any doubt about the impact that quants and their mathematical models have on the financial markets, consider this …

Morgan Stanley projects that bots, or “robos,” will control as much as $6.5 trillion of the world’s investable assets by 2025. That’s incredible!

I’m going to repeat this because it’s important …

Quants, via their computers, are set gain control over $6.5 trillion of global wealth over the next 10 years.

What’s more, mathematically based hedge funds have almost doubled their trading volume since 2013. That’s according to the TABB Group, a research and consulting firm in New York City. Tabb also reports that these funds are now responsible for an eye-popping 27% of all U.S. stock trades — up from 14% in 2013.

Now, consider this: The robots have almost caught up to individual investors in terms of buying power. Individuals still outnumber quants by a huge margin. Yet, collectively, they account for just 29% of all stock-trading volume.

Now here comes the chink in the robot’s seemingly impenetrable armor …

Mathematician William Byers literally wrote the book on “How Mathematicians Think.” And Byers warns against rendering the world only in terms of numbers. He argues that the complexity of the math can deceive investors.

It can convince them that their computers churn out more-reliable predictions than they really do.

And that’s where my Safe Money approach comes in. It trumps the false promises of the robots’ perfect precision.

I’ve made a point of hammering home the key elements that support the post-Trump election rally. And I don’t need a computer to figure it out:

• The global economy has been able to successfully fight off the persistent deflationary forces that come with an overleveraged economy.

• Global central banks are holding interest rates near historic lows. This is true even as Janet Yellen, “Super” Mario Draghi and Haruhiko Kuroda mull trimming the extraordinary stimulus efforts set up in the wake of the financial crisis.

• And institutional investors, such as pension funds and endowments — which are faced with paltry yields on safer assets, including government bonds or savings accounts — have few choices outside of stocks to earn meaningful returns.

That’s because growth is the magic elixir in a global economy that’s just limping along. And companies that can consistently grow their bottom lines by producing things people will buy will be rewarded with whopping valuations in this environment.

The bottom line: Go where the growth is.

Consider how a firm that once called itself the Minnesota Mining and Manufacturing Company has managed to grow its business for 115 years and counting …

The 3M Co. (MMM), as you know it today, makes a wide array of industrial and consumer products. It plays in many spaces: industrial, safety and graphics, healthcare, electronics, energy and consumer business segments.

A big part of its growth strategy has been to invest in human capital — specifically, research and development — to create innovative products. Its management team has also done a good job of acquiring other companies and of expanding into faster-growing emerging markets.

These very human touches are paying off pretty handsomely. 3M forecasts that it will grow earnings 11.24% over last year’s, and at an average 10.17% annual rate over the next five years.

And the stock is rising as a result. MMM is up more than 30% since I recommended it to my subscribers earlier this year.

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MMM also maintains a dividend yield of just over 2%. That puts it in the same ballpark as what the 10-year U.S. Treasury pays. Great growth and a generous dividend yield make MMM a winning candidate for your portfolio, as long as your risk profile permits.

Bottom line: Perhaps the “robos” are the investment solution of the future. But for my money — and for my subscribers’ — good, old-fashioned stock-picking coupled with good timing can go a long way.

Come back next week and I’ll tell you more about how the robots use algorithms to game the markets and give you another growth stock idea that’s set up to be a winner in a slow-growth world.

Best wishes,

Bill Hall

P.S. Bloomberg says, select marijuana stocks are posting gains of up to 4,966% right now. That’s enough to turn a $20,000 grubstake into MORE THAN ONE MILLION DOLLARS in as few as four, short months … And that’s WITHOUT the use of options, futures, or margins — no exotic investment vehicles of any kind! Read More Here …

Bill Hall is the editor of the Safe Money Report. He is a Certified Public Accountant (CPA), Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP). Besides his editorial duties with Weiss Research, Bill is the managing director of Plimsoll Mark Capital, a firm that provides financial, tax and investment advice to wealthy families all over the world.