How I Trade Stocks For a Living -- [Chapter 6]

CHAPTER 6:  The Beanieville System (Part 1)
 
In chapter four, I've talked about how a real businessman thinks and what
his ultimate goals are in terms of building a business.  You can emulate the
process by producing awesome income generating businesses yourself by
means via the stock market.  You don't have to create or buy a physical
business that comes with all the endless headaches associated with running
the business and hiring and managing employees.  How is that possible,
especially the income generating part?  You can buy stock shares of a
company like McDonalds (MCD) if you want to own business in the
retail/restaurant sector, but it doesn't produce any income.  Or does it? 
McDonalds pays an annual dividend to its shareholders at a current $1.50
per share.  Well, that kind of passive dividend income is nothing to harp
about if you have $30,000 and are able to invest in about 500 shares of the
stock (currently at $62 per share).  At $750 (500x$1.50) a year of passive
income, that's not a real business!  That's pathetically meager and could
barely buy a latte a day!
 
Can you turn those 500 shares of MCD into a real business?  Yes!   And you
do this by trading the stock itself.  No, you don't just buy the stock and wait
until it goes higher and you then sell it for a profit.  That would be equivalent
to what a "flipper" of a business does.  If that is your modus operandi, then
what comes next?  You go buy another stock and flip it again?  Well, you
better be good at it because most people who invest in the stock market
does this.  And you already know that most of them will fail.
 
The key is to sell the stock if you think it goes lower, and then buy it back at
a lower price.  You are doing this to lower your cost basis, everybody knows
that.  But I contend that you are actually doing more than just lowering your
cost basis for the stock.  Over the long run, you are actually GENERATING INCOME!  Let me repeat that to you again because it's so important:  ​Over the long run if you keep on doing this many times, YOU ARE ACTUALLY GENERATING INCOME!​  That's because after you've lower your cost basis to 0, everything else after that is essentially INCOME.  ​Your stock becomes your business, and you selling it and buying it back lower becomes your income​.  Do you understand?  Every trader and investor knows about lowering cost basis, but nobody I know gets far enough in their thinking and application to realize that you are actually generating income when you buy back your stock at a lower price than what you sold it for. 

This is a very important element to The Beanieville System.  Take a few
moments and really think about what I just said.  This all-powerful concept
itself that so few people comprehend or apply in their trading/investing is
worth many times what you paid for the manual.  You can now become a
real businessman!
 
Now, before I go further in giving you two very powerful examples of The
Beanieville System, I want to make up two symbols for easier discussion
between you and me.  They are:
 
BVI

 = The Beanieville System Income = unit representing the difference in
dollar amount you "saved" by the price you sold and the price you bought
back the stock
 
$BVI

 = BVI x number of shares of the stock you own = the total money you
"saved" = Total Income (in the long run)
 
So if you own 500 shares of McDonalds (MCD) and you sold at $62 and
bought back the stock at $60, your BVI would be 2 (62-60) and your $BVI
would be $1000 (2x500).
 
Since MCD, if you look at its 5-day chart, moves about a $1 range per day,
as a daytrader it is possible to make .5 to 1.0 BVI or $250 to $500 in income
($BVI) on certain days.  As a swing trader, if the charts show you that the
stock will likely go from $62 to $50 in a couple of weeks or months, then you
might want to sell at $62 and buy back at $50.  In that case, your BVI=12
(62-50) and your $BVI=$6000 (12x500).  If you are more aggressive, you
can short the stock at $62 and buy back at $50; in this case, you are
actually generating BVI=24 (12 from shorting plus 12 from "saving") and
your $BVI would become $12,000 (24x500).  This is truly amazing stuff! 
You put in the initial $30,000 to invest in MCD and you generate
$BVI=$12,000 (for the last example).  Do this enough times, you will end up
owning the business free and clear and it continues to generate income for
you for the life of the business.  You see, McDonalds is a company that will
be around for many many years and you can keep on generating income for
all those years to come.  Your shares of MCD could also go up in value as
the company grows more valuable in the future.  Maybe they'll split the
shares 2 for 1, who knows.
 
The $BVI's you generated can be re-invested back into your business by
buying more shares of MCD, and thereby allowing you to generate an even
bigger income.  If you are trying to make a living trading stocks, then you
can take out a certain portion of your $BVI to pay your bills and personal
expenses.  Obviously, taxes always need to be considered but I'm not going
to go too much into it.  If you have a corporate job, you can trade your
stocks within your 401k and not worry about taxes.  If you're doing this
full-time as a trader, then you will need to generate enough $BVI to support
yourself and be able to save some if you end up with a tax bill.
 
Of course, all this assumes you know how to trade and read charts and sell
stocks and buy back lower.  Now that you have what I consider the most
powerful big picture system on earth, all you need to focus on is how to
trade, be it daytrading (intraday), swing trading (2 to 10 days) or position
trading (2 weeks to 3 months or longer).  This part is not the goal of The
Beanieville System to teach you, but you can certainly plug all the other
trading systems you use into The Beanieville System.  You can plug the
Fading the Gap technique, Trading Around the Core Position technique, and
SwingTrading techniques into The Beanieville System.  Personally, I mostly
use simple supports/resistances, moving averages, the MACD, and simple candlesticks charting ​after the first 30 minutes of the opening bell.  Fading the Gap (during the first 30 minutes of the opening bell) is not for everybody
and even I don't use it that often unless there is compelling reason to do so.
 
When you trade using The Beanieville System, ​you should be back into the stock by the end of the day​ if you're trying to generate BVI on a daily basis (as a day trader).  If your chart readings tell you that the stock is going lower in the coming days or weeks, you can certainly stay in cash for a length of time (or you can even short the stock and double your BVI).  For those with accounts less than $25,000 and subjected to the Pattern Daytrading Rule, being back into the stock by the end of the day makes a lot of sense.  Say you own the stock on Monday, and on Tuesday you chose your high point to sell the stock and then you buy it back on the same day.  This move does not use up any of your day trades, because your sell on Tuesday closes that buy position on Monday.  This does not count as a
daytrade.  You new buy on Tuesday is considered a new trade but since you
didn't close that new position after you bought it, it's not considered a day
trade.  And on Wednesday, when you sell, you are actually closing out
Tuesday's position.  That doesn't count as a daytrade.  Do you understand?
 
If it's still confusing, consult your broker.  If, however, you have more than
$25,000 in your account, you can obviously trade the stock as many times
as you like throughout the day.  Buy it back lower each time if you can, and
at the end of the day just get back into the stock (remember that you are
also "investing" as well and being back in the stock means you can ride any
huge gap ups the next day) and you're done for the day.  You can generate
a huge amount of BVI in one day alone if you trade right and the stock is
volatile enough.    
 
Note that you must not let your stock go rocket higher after you have sold
it, because that would generate a negative BVI and hence a negative $BVI. 
In this case, it would be the opposite of generating income.  You would
generate a loss.  You need to buy back your stock quickly if you think it goes
much higher.  Cut your losses!  However, losses are a part of doing
business.  As long as the incomes overwhelm the losses, you're going to
come out a winner.  The better a trader you become, the more income and
less losses you will generate.  Since The Beanieville System requires you to
only focus on the small number of stocks (your businesses) you own, trading
becomes a lot easier because you get to know intimately the ins and outs of
your stocks and how they behave.  
 
Another not-so-obvious benefit of The Beanieville System is that since it is
really a long term investing system, you can put more money into your
stocks/businesses, much like what an investor does, than you would
normally put into stocks you trade for the short term.  The reason you
cannot put too much money into stocks you trade in the short term  (i.e. day
trading or swing trading) is because you can get hurt badly if something
unforeseen causes your stock to spiral downhill.  Then you end up selling in
disgust with a huge loss, without a chance of recouping any of the losses as
you move onto another stock.  This is how most traders function, with
dismal results.  With The Beanieville System, even if your stock implodes,
your goal is always to continue generating a positive BVI and owning your
business/stock free and clear.   However, some traders prefer to buy a stock
and sell once they get a profit and they like another stock more.  Then they
get into the other stock, and if the stock goes down they try to generate
BVIs until the position becomes profitable for them and they sell and move
on.  That is certainly another avenue you can take, especially if you feel the
stock isn't the best business for the long run.  The possibilities are endless
on how you approach things using my system.
 
In the next chapter, I will give you two very powerful examples and
applications of The Beanieville System.


Leave a comment

Please note, comments must be approved before they are published