Insiders might sell their shares for any number of reasons, but they buy them for only one.”

— Peter Lynch

Peter Lynch was arguably the greatest investor of his era.

Between 1977 and 1990, Lynch managed the Fidelity Magellan Fund to a 29% average annual return, beating the S&P 500 benchmark in 11 out of 13 years.

Insider buying was one of Lynch’s core 21 “Peter Principles” outlined in his bestseller, “Beating the Street.”

Lynch’s insider buying principle is based on the observation that “corporate insiders” always will enjoy an edge over small investors.

These insiders include the top officers, directors and major shareholders who have access to critical company information before it is made available to the public.

On one hand, the Internet can overwhelm you with a seemingly infinite amount of information.

On the other, you always will be a step behind those with access to non-public information. Insiders know their businesses and industries better than anyone else.

In fact, if you ever do come across such non-public information — say, through a neighbor with loose lips — acting on it could get you carted off by the Securities and Exchange Commission (SEC) for insider trading.

‘Legal Insider Trading’

As it turns out, you can benefit legally — although indirectly — from this “inside information.”

That’s because all corporate insiders must, by law, file a “Statement of Changes in Beneficial Ownership of Securities” (SEC Form 4) within two days of  buying a stock. You can go online right now and use the EDGAR system to see which corporate insiders are buying which shares.

Of course, corporate insiders only buy shares because they expect the stock to go up. That’s the case even if the “inside information” remains a secret.

The Corporate Insider Buying Strategy

Investing based upon corporate insider buying has been a well-established strategy among Wall Street’s smart money for decades.

This smart money includes hedge fund, pension fund and mutual fund portfolio managers.

In theory, thanks to SEC Form 4, every small investor also has access to the same information on corporate insider buying.

In practice, however, it takes time and money to research and analyze individual stocks even if they are available at the click of a mouse.

Small investors don’t have the countless hours, technology and resources to do this.

As a result, until relatively recently, small investors were left on the sidelines.

How to Profit from Corporate Insider Buying

Enter the Direxion All Cap Insider Sentiment Shares ETF (KNOW), which tracks the Sabrient Multi-Cap Insider/Analyst Quant-Weighted Index. This index tracks all of the best stocks that corporate insiders are buying.

KNOW focuses on identifying “open-market purchases” which require insiders to buy company stock on the open market and finance these purchases from their own pockets.

Put another way, only open-market purchases ensure that corporate insiders have real “skin in the game.”

Specifically, KNOW tracks corporate insider buying in the S&P Composite 1500 Index, which covers 90% of U.S. market capitalization.

Analysts reduce the original list of 1,500 stocks to the top 100 stocks after looking at the number of purchasers and the percentage increase in holdings, as well as analyst expectations and revisions.

KNOW then overweights stocks that historically have performed well in weak markets, have strong free cash flow and healthy dividend yields. It weights top stocks more aggressively at a maximum of 2.6% each, while the bottom 50 are weighted at 0.35% each.

The Proof is in the Performance

KNOW’s strategy has yielded some impressive numbers, as the fund has strongly outperformed the S&P 500 since its inception in December 2011.

GG 2-21

Direxion All Cap Insider Sentiment ETF (KNOW) vs. S&P 500 since Inception

KNOW’s outperformance relative to the S&P 500 has faded over the past two years as small- and mid-cap stocks have underperformed higher-profile mega-cap rivals. But I expect KNOW to resume its outperformance as smaller stocks regain their footing.

Tracking corporate insider buying remains a time-tested approach to picking winning stocks. After all, the motivation for buying by corporate insiders has not changed since Peter Lynch.

The bottom line?

KNOW follows a time-tested, quantitative strategy that tracks the real world “smart money” investments of corporate insiders.

That means investing in KNOW could be one of the smartest investment moves you can make.

P.S. I’m a big believer in following Wall Street’s “Smart Money.” Another little known SEC regulation forces Wall Street’s best hedge funds and mutual funds to disclose their top investments to the public.

Tracking these “Smart Money” investments has generated some terrific returns over a short period. In fact, I found this approach so compelling that I’ve just launched a new investment service — Smart Money Masters –– based on this simple, but powerful, idea.

To find out more about Smart Money Masters, click here.

In case you missed it, I encourage you to read my e-letter article from last week about the comeback of global stock markets in 2017.