By Rob Fannon

I thought it was an urban legend – an investment book selling for $1,000.

But do a search on Amazon for "Margin of Safety," and you'll see what I mean. New copies of Seth Klarman's out-of-print book fetch anywhere from $1,200 to $2,500 a pop. Forget about checking it out at your local library. Freebooters have swiped most public copies.

Klarman is a legendary value investor. His hedge fund, the Baupost Group, manages over $15 billion. He's generated average returns of around 20% a year for the last two decades. Klarman doesn't use leverage and often keeps 20%-40% of his portfolio in cash, making his returns even more impressive.

Some speculate Klarman's 1991 book is out of print because it shared too many of the guru's secrets. But by now, many of those secrets have evolved into major tenets of modern value investing.

Recently, I was able to borrow a copy of this collector's item from a friend. Most of the information isn't as earth shattering today as it was 18 years ago. But I found plenty of relevant wisdom...

In chapter 10, for example, Klarman lists a few places to dig for hidden value: corporate liquidations, rights offerings or warrants, complex securities, risk arbitrage, and corporate spinoffs. These are now well-established hunting grounds for value investors. But Klarman also emphasizes the need for some catalyst on the horizon to help unlock that value to the rest of the market.

That's the secret to one of my favorite portfolio positions and a huge upcoming trade. Let me explain...

The most straightforward of Klarman's strategies for retail investors is buying corporate spinoffs. Spinoffs occur when a company carves out a division to create a new stand-alone business.

As my colleague George Huang highlighted, big institutional investors typically want nothing to do with spinoffs. Mutual funds often can't hold these spinoffs without violating some market cap, profitability, or index-tracking restrictions in their bylaws.

So spinoffs tend to sell off with no regard to price or value... Combined with an explosive catalyst, that can create a huge profit opportunity.

For example, back in June, diagnostic company Myriad Genetics spun off Myriad Pharmaceuticals, its drug-development business.

Sure enough, institutional investors sold shares hand over fist. The new Myriad Pharmaceuticals dropped as much as 20% in its first few days of trading. My Phase 1 Investor readers were able to establish positions at a 40% discount to cash – and got access to the company's HIV and cancer drug pipeline for free.

So far, we're up 20% on the position. Not bad. But in mid-November, Myriad will announce important Phase II data for one of its cancer drugs. That's the catalyst that could double those existing gains overnight. And with multiple drugs in its pipeline, Myriad Pharmaceuticals has plenty more profit catalysts on the horizon.

But for new money, I don't consider Myriad Pharmaceuticals the no-brainer trade it once was. Instead, I'm eyeing up a pending spinoff from another Phase 1 position...

This past Tuesday, contract research organization Pharmaceutical Product Development (PPDI) announced it would spin out its drug-development arm sometime next year.

It's seeding the daughter company with $100 million cash, plus rights to its current partnered drug portfolio, which includes cardiovascular, dermatology, and diabetes candidates. Plenty of catalysts here...

Right now, PPDI is rated a "hold" in our portfolio. But if shares of the spinoff trade down like I expect, I'll tell subscribers to double down on the new company. You should keep your eye out for the opportunity, too.

Good investing,

Rob Fannon