One of our strategies for maintaining rational thinking at all times is to attempt to avoid the extreme stresses that lead to poor decision-making. We have often described our technique for accomplishing this: willingness to hold cash in the absence of compelling investment opportunity, a strong sell discipline, significant hedging activity and avoidance of recourse leverage among others.
-Seth Klarman head of Baupost
From a quant perspective, there are simple rules that can be applied from Seth Klarman.
- Make conditional bets.
- Set a threshold for expected return - beat a cash return
- Form a strong exit strategy - Know when to get out.
- Minimize directional risk or pure beta.
- Control leverage.
The common thread for good discretionary and quant traders is discipline. Follow a set of rules and play the odds. Know the count.
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