In the past six years there have been two flash crashes, including one that occurred exactly a year ago in 2015. Jim Cramer will be ready for the next one, and wants investors to be prepared, too.
"Fool me once, shame on you. Fool me twice, and I'm an idiot who deserves the heat," the "Mad Money" host said.
The term flash crash refers a special event when the stock market drops quickly, almost in the blink of an eye. It can result in a dramatic loss of about 1,000 points on the Dow. Both flash crashes had a similar theme: something negative overseas either triggered, or was thought to trigger an event in the U.S. that investors couldn't grasp. It caused an immense amount of fear and paralysis.
In Cramer's perspective, it's not a matter of if a flash crash will happen again, it's a matter of when.
So, to prepare investors, Cramer outlined his rules for the next flash crash.
No. 1 Never use market orders. A market order is an order to buy or sell a stock executed at the current market price. Market orders can be messy, and have no specific price allocated, so investors can get crushed by machine algorithms, Cramer said.
That is why he recommended limit orders, which is an order for a set amount of securities at a specific price, or better. In the flash crash of 2010, Cramer monitored Procter & Gamble to buy for his charitable trust. After all, if Greece was really the reason for the flash crash back then, people would still need to shave and wash their clothes.
"When you suspect that you've got a flash crash on your hands, you need to be ready with your own Procter & Gamble-like ideas," Cramer said.
No. 2 Have multiple stock ideas. Investors cannot just reach for a Procter & Gamble, because some stocks will crash harder than others, and no one knows which ones they will be. Cramer recommended high-quality stocks with little economic sensitivity. Those are the ones left standing once the smoke clears and have a history of being able to pay dividends no matter what.
For instance, General Mills paid its dividends through two world wars, the Great Depression and Great Recession.
"When the next flash crash occurs, we might not have the luxury to step off the desk to make calls. We may not be able to see Procter trading down," Cramer said, "But we will be ready, and yes, we will even be salivating for the next flash crash so we can brag that not only were we there, we made a killing."