While the market keeps rising, hedge fund guru Seth Klarman isn’t getting too comfortable.

In Baupost Group’s fourth-quarter letter, Klarman says that the time to tend to risk management is when the market looks strong, ValueWalk reports. It is “of paramount importance to do everything humanly possible in a bull market to prepare for the next bear market,” the letter states. “Improve processes and procedures. Train up your team. Stick to your knitting. Avoid portfolio leverage. Maintain sell discipline. Develop a loyal and supportive clientele. Match your funds’ liquidity terms with the liquidity of the underlying investments as best as possible. Hold some cash in reserve to take advantage of future opportunity.”

Klarman says that while stocks and bonds are in favor now, things can change quickly in the market. When downturns occur, he says, “We typically distinguish ourselves by not being overstretched going in. With names we first purchased at higher prices, we typically are adding more at the bargain counter, where a little incremental capital goes a long way. As the situation warrants, we can inject fresh capital directly into a capital structure on favorable terms to right a faltering ship. If successfully executed, we are able to load up in a bear market on bargains that will still be paying off for us three or even five years in the future.”

Klarman also says independent thinking is crucial. “In a business plagued by group think and conventional wisdom, we try to avoid consensus thinking,” he said. “We don’t mind being out of sync with the herd, and we don’t let that get to us. While we enjoy the challenge of analytically complex situations, we begin by looking for low-hanging fruit while eschewing the ‘high-hanging’ kind. We prefer ‘no-brainers’ to ‘brainers,’ and we are willing to work diligently and patiently to find them. When opportunity is scarce and markets expensive, it is dangerous to force money into new investments. We are disciplined at all times, and when we can’t find bargains, we choose to hold cash–sometimes large amounts– as a residual of our bottom-up investment process. This is something few on Wall Street appear able or willing to do.”

While Baupost is a hedge fund, Klarman says that in many ways they don’t act like one. They don’t engage in “frenetic trading of macro bets, quarterly earnings forecasts, or momentum strategies”, which he calls distractions.