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Cramer: How I lucked out in the crash of 1987

  • "Mad Money" host Jim Cramer recalls his experience during the historic market crash of 1987 and shares his biggest takeaways.
  • Black Monday wasn't the worst of the downfall; Tuesday was when chaos really hit, Cramer says.

CNBC's Jim Cramer had a unique experience during the historic market crash of 1987 that occurred 30 years ago Thursday.

"People always want to talk about Black Monday, 30 years ago today where the Dow lost 500 points, erasing more than 20 percent of the market's value," the "Mad Money" host said. "But as bad as Black Monday was, believe it or not, it was the next day — Terrible Tuesday, as it was known back then — that really scared the bejesus out of people."

The day after the crash, investors, traders and fund managers alike could not determine the lay of the land, Cramer said. Stock prices were unclear, equities were falling, and the futures suggested the market had another 20 percent decline ahead.

"It was as if the world had ended and it didn't matter what you owned, it was going to be beaten down to a pulp by the endless cascade of Chicago S&P futures raining on the New York Stock Exchange," Cramer said. "I was scared stiff."

But in the week before the crash, one of the worst weeks for the market Cramer had seen in his lifetime, he got a call from Karen Cramer, a trader at a large institutional firm.

She told Cramer, who had just started his hedge fund in February 1987, that the market was going to crash on Monday and that he should sell everything.

As instructed, Cramer shed his entire portfolio except for a small position in the stock of Johnson & Johnson. On Black Monday, that put option made Cramer $100,000.

But on Tuesday, Cramer's brokerage report didn't show the money he had made. Panicked, he called anyone he could and was told that he might not be paid at all.

"That was the depth of the chaos we were experiencing," the "Mad Money" host recalled.

It was only when Alan Greenspan, the Federal Reserve chairman at the time, announced that the central bank would provide liquidity to the markets that things started to go back to normal.

By the end of the day on Tuesday, Cramer heard he would be paid. He received the money the following week.

But whenever Cramer is asked if he took advantage of the crash knowing that the economy was healthy, he comes back with two retorts:

"First, you didn't know the economy was sound. Markets are supposed to be forecasting machines, and even though the economy seemed strong, you simply could have no confidence that it would stay that way after two disastrous days," he said. "Second, and more important, there was no, what we call, price discovery. You just couldn't get a market of any size because nobody could figure out what the prices should be for great American companies. The market flat-out failed."

Cramer knows that comparisons will inevitably be drawn between 1987 and 2017, so he wanted to offer a key takeaway for investors.

"My takeaway is that while the machines do rule, at least we have circuit breakers that slow things down and make it so the market does function, albeit at times in a fashion that forces you to use limit, not market orders, so you don't get picked off as many were in the flash crash a few years ago," he said.

And Cramer will never forget Karen Cramer's fateful prediction that saved him from losing everything.

"[It was] a remarkable call and one that I lived off of for the rest of my firm's 14-year life, showing that trading sheet for Black Monday with no positions, save the puts, to anyone interested in being a partner," the "Mad Money" host said. "Of course, you could say that it's better to be lucky than good, but best of all is to be both lucky and good, which is exactly what we were."

WATCH: Cramer's experience with the market crash of 1987

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