The system failed today – the market dropped 546 points on a machine failure. Some mistakes were made involving derivatives, and there were no governors and no umpires to fix them. The breakdown was so fast there wasn’t even time to panic. You might have been caught in the middle of it. Don’t worry, though, Cramer’s here to help.
The most important takeaway from today is that you only have three ways to protect yourself from the whims of a broken system.
You either have a stock that pays you a dividend that's equal to or better than treasuries AFTER taxes – that's a good defense. Or you have stocks that are so low in valuation that you know they're bargains AND the companies know they're too cheap too, meaning they are buying back stock right here.
The last option is, you need to have companies that are so defensive in nature that they'll be able to meet or beat their expectations even in the midst of a worldwide slowdown. Cramer is thinking along the lines of Coke, Pepsi or Altria, as well as Kellogg, General Mills, Clorox or Colgate. These stocks will now come back into vogue because of fears that the Chinese-related downturn will spark a worldwide slowdown.
If you own a stock that doesn't have a big, Treasury-beating dividend, a low valuation coupled with a mighty buyback, or an extremely defensive nature, you're courting disaster. Preferably you should own stocks with two of these things going for them. Cramer doesn’t think anything else can work because there will be so many people panicking out of the market and selling everything else.
One of Cramer’s tenets is that “nobody ever made a dime panicking.” This time will be no different, but only if you are shrewd about what won't hurt you and what can work in a volatile and down environment.
Bottom line: The system's broken, but that's not a reason to abandon ship. Just be sure to own stocks with big dividends, big buybacks, or defensive natures – and preferably two out of those three.