Next on his list were speculation stocks. Cramer always talks about specs, but what exactly does he mean?
These stocks present higher risk, but also offer higher reward. Something to keep you interested!
When compared with the standard fare in Cramer's other strategy — think dividend yields and growth stocks — a high-risk stock hardly seems to make sense. Speculation always seems to be that dirty little word investors are told to avoid.
"Not only is it okay for you to own those tempting, risky, broken-seeming stocks that trade in the single digits, it's a necessity, as long as you follow my rules and speculate wisely," Cramer said.
Growth stocks come next. But how can you tell if a stock is, in fact, a growth stock? Use basic algebra — that's how to tell. Here's the methodology that Cramer uses:
"The share price, P, equals the earnings per share, E, times what's known as the multiple, M," Cramer said. In other words, "E times M equals P."
"The multiple is the key. It tells us what investors are willing to fork over for a company's future earnings. And the most important factor influencing multiple is the company's growth rate," Cramer said. "The Street will pay a bigger multiple for businesses with faster growth because that growth means the earnings will get larger and larger in the years ahead."
What does a healthy geography mean? Previously, Cramer would have recommended adding foreign exposure to a portfolio. But now that he has seen the damage left behind from Europe, China and the emerging markets, he tweaked that definition.
"What you really need is a stock that is in a safe geography. At times, when the United States is growing more slowly than the rest of the world, you need something international — and not just something that does a lot of business overseas," he said.
Cramer means a company actually headquartered in a foreign country. The "Mad Money" host referred to a safe geography because foreign stocks are not always a good idea.
Sometimes, when it seems like the world is falling apart, the domestic security of the U.S. will shield your portfolio from the dangers of the rest of the world.