Follow the Smart Money

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What's the best way to profit from investing in stocks?

Some people will tell you to buy cheap stocks. Others insist that such stocks are cheap for a reason -- and that growth is the way to go.

And then there's the smart money. 

In his classic manual on investing in insider trading, The Vital Few vs. the Trivial Many, famed hedge fund advisor George Muzea explains how he started out as a broker at E.F. Hutton. He tried a little value investing. He gave growth a shot. But Muzea ultimately concluded that there's just one surefire way to beat the market. Thanks to this discovery, he's now one of the most sought-after hedge fund advisors on the planet, complete with a speed-dial entry on George Soros' iPhone.

So what's the secret to his success?

"When I see a stock on the new low list or one that is being panned in the media, I always look to see what insiders are doing." It's a simple strategy, and the reason for it is just as obvious: "Who knew better what was going on in companies than the officers and directors?"

If you're not inside, you're ... the rest of us
Whether it's the chairman of the board, the CEO, or the HR receptionist who knows when a hiring boom is under way: All the way down the corporate flowchart, companies are teeming with people who know more about their companies' health than do you or I. And while it's true that insiders sell stock for many reasons, there's really just one reason a company employee cashes his hard-earned paycheck, then turns around and buys company stock: They think it's going up.

Now, even corporate insiders aren't omniscient. As Muzea explains: "Beyond [about six months] they are guessing just like everyone else." But logically, if you can restrict your investing timeframe to period of six months or less, then insider trading should offer good clues to what to expect. With this prelude out of the way, we turn to a few notable insider trades -- all perfectly legal, by the way, and duly reported to the SEC by way of Form 4 filings. During the past few days, we've seen:

• Starbucks (Nasdaq: SBUX): A director bought 2,000 shares at an average price of $21.73 per share.
• Duke Energy (NYSE: DUK): Another director picked up 5,000 shares at $16.16.
• Amgen (Nasdaq: AMGN): Surprise! Yet another director bought 800 shares at $56.14.
• Sprint Nextel (NYSE: S): Here, the CFO nibbled at $3.11 per share, buying 3,225 shares in the latest of a string of automatic purchases.

Nibbles, pshaw. Show me who's gorging!
But the one transaction that really stands out for me this week is ... well, actually, it's three transactions. Over at the Enterprise family of companies, Chairman Dan Duncan has continued the buying spree we highlighted one month ago. In the past 10 days, he's laid out nearly $8 million more in cash to expand his stakes in Enterprise GP Holdings and Enterprise Products Partners (NYSE: EPD). Why is this significant?

As Mr. Muzea confides: "Normal insider behavior would be to buy into price weakness and to sell into price strength." In contrast: "What you want to look for are new purchases where insiders are buying as the stock goes up, as this implies more good news is coming."

Mr. Duncan's most recent purchases of Enterprise GP and Enterprise Products were made at prices right around or even above where the stocks were trading when that article ran. He's been buying substantial amounts of Enterprise Products stock steadily from as far back as September, increasing his total holdings of the company by about 15% over the past three months.

And the most surprising bit of trivia? Much of that increase came in the form of a massive 16.6 million-share grant from the company. Yet on top of that "free money," he still laid out the cash to buy more than 6 million additional shares.

Foolish takeaway
Both Enterprise GP and Enterprise Products pay superb dividend yields -- 5.7% for Enterprise GP, and 7.5% for Enterprise Products -- numbers that compare favorably to the dividends on offer over at fellow natural gas plays like Spectra Energy (NYSE: SE) or El Paso Corp (NYSE: EP). But can those beefy yields make up for the fact that both Enterprise GP and Enterprise Products carry double-digit P/E ratios alongside single-digit projected growth rates?

The Chairman seems to think so -- and from all I've seen, it pays to follow the leader. But what do you think? Scroll down a bit, and post your comments below.