NEW YORK (TheStreet) -- When you hear the word "algorithm" you might cringe at the thought of computer programs that have an impact on stock prices and have caused "flash crashes."
The fact is that the language of algorithms, which are the "operational brains" behind computer programs, can help businesses gather consumer information or expedite complex tasks in seconds.
Recently, I spoke with Dr. Richard Smith, the founder of
about the mathematics behind smart computer programs.
Smith went to school at the University of California at Berkeley (one of the nation's top schools in math) and received a Ph.D. in "mathematical systems theory." Through his own personal research and experience he's developed a passionate mission to put easy-to-use technology-based tools into the hands of individual investors and traders.
He knows that algorithms can be used for good purposes, like helping investors develop a simpler buy or sell discipline or to create an emotions-free exit strategy like the one he created with Trade Stops.
As Smith has mentioned to me several times in conversation, "We've all heard it before, 'You've got to cut your losses and let your winners ride.' The fact of investment experience is that it's absolutely true.
"More than any other single factor the individual investor is handicapped by the tendency to tolerate losses while nervously grabbing gains off the table early for fear of losing them."
By creating algorithms that override our human tendencies to tolerate losses or not letting our profitable trades run, computer programmers and mathematicians like Smith have protected us from our human nature's tendency to be self-deceiving.
This enables us to work our own style of investment planning and at the same time make sure that we limits losses and maximizes gains. Remember this the next time someone badmouths algorithms.
Speaking of algorithms, I was recently impressed by an article in
The Wall Street Journal
titled "Automatons Get Creative" that illustrated many of the comments Smith made and demonstrates some of the uses and misuses of algorithms.
One poignant example the article pointed out had to do with
, the European telecom company.
"The next time you call, the algorithms, recognizing your phone number, will route you to an agent with a personality similar to your own, which results in calls that are half as long and reach happy resolutions 92% of the time, compared with 47% otherwise," the article said.
This helpful insight into how algorithms can lead to better results came from an assessment of 1,500 customer service calls at Vodafone. VOD is a remarkable company with an incredible
array of products, services and solutions that has ridden the "smartphone-digital tsunami" to very profitable global accomplishments.
Remember, Vodafone helped to start (as a joint venture) Verizon Wireless, the largest wireless communications services provider in the United States with 108.7 million subscribers as of the end of 2011.
As I understand it,
owns 55% of Verizon Wireless and Vodafone owns 45%.
If you'd used some of Smith's technology with companies like VZ and VOD you might have had a remarkable and profitable ride, as the stock price comparison chart below illustrates.
If you'd purchased shares of VOD and VZ in the middle of 2010 and placed a 25% trailing stop loss (if you'd used Trade Stops the stock exchanges wouldn't have been able to see your orders either) you'd have gains now of approximately 50% (depending on when you purchased shares) with VOD and around 47% with VZ.
When you consider that the dividend yield on VZ has been between 4.7% and over 6% (yield-to-price) and Vodafone's dividend yield has been between 6.8% and 7.9% during that period of time...well...you might be tempted to kick yourself.
Instead, why not be firmly gentle on yourself and be determined to buy these two great companies' stocks when they're "on sale" (which might be very soon if we can catch a nice correction) and ride their ongoing growth wave to the shores of customer satisfaction and shareholder bliss.
If you're using an intelligent (think algorithm) program that allows you to determine how much risk you're willing to take and how much of your future gains you want to protect (think a trailing stop loss system like TradeStops.com offers) you can "dive in" with more confidence, protected from your own emotions.
After all where else are you going to get a 5 to 7% steady dividend yield from cash-rich sources that have gigantic revenue streams (VOD annual revenues for the past 12 months are over $73 billion and Verizon's is over $113 billion)?
Start by getting familiar with these two colossal telecoms and decide what price levels you want to begin accumulating their valuable shares. Their ability to combine the reliability of mathematics with the unlimited capabilities of smart technologies will help both companies shine in the years and decades ahead.
At the time of publication the author had no positions in any of the companies mentioned in this article.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.