There are many different kinds of sell-offs — from garden-variety pullbacks to wholesale breakdowns like the 2008 financial crisis — but the key for investors is knowing why they're occurring, CNBC's Jim Cramer says.
"There are all sorts of sell-offs, but unless they involve systemic risk, they're going to prove to be buying opportunities," he told investors. "You just need to recognize why the sell-off is occurring, note the signs that it might be subsiding and then take action to buy, not sell, and never to panic."
The first type of "buyable" decline Cramer addressed is a margin-induced sell-off. This happens when money managers borrow more money than they should to make investments, so when the stock market falls, they don't have enough capital to pay back margin clerks.
This kind of sell-off happened in February 2018, when funds that had borrowed money to bet against volatility, or big stock market swings, got caught in a sell-off and were forced to sell their S&P 500 positions, sending stocks even lower.
"These margin-induced breakdowns often occur after several days where the market's down," the "Mad Money" host said. "That's why I'm often reluctant to tell you to be aggressive in the first few days of a big decline because there are always going to be margin clerks against these managers who buy stocks with borrowed money."
To know when this kind of decline will end, Cramer uses the clock. Because margin clerks don't want their firms to have to put up collateral to cover big declines, they typically sell clients out of their positions between 1:00 and 2:00 p.m.
"If the selling runs its course by 2:45 p.m. — yes, I find it to be actually that specific — then I think you have a decent chance to start buying safety stocks, the kinds of stocks that tend not to need the economy to be strong to advance like the health care stocks," Cramer said, adding that fast-growing stocks in secular industries tend to be safe, too.
Overseas sell-offs can also be scary for investors, but unless the foreign woes fundamentally impact U.S. companies in some way, the "Mad Money" host usually finds the concerns around them to be overblown.
Another dangerous type of sell-off is tied to initial public offerings. When too many companies go public and then sell their shares via secondary offerings, it creates too much supply in the stock market, Cramer said.
"My suggestion? Avoid the blast zone, please, the area where most of the new IPOs are concentrated, and focus on the stocks that are down because of collateral damage," he told investors.
Simultaneous earnings shortfalls can also cause sell-offs. In those cases, Cramer suggested being nimble and avoiding the sectors where the shortfalls occurred. Instead, he said, opt for stocks that are hit by the aftereffects.
Finally, Cramer knows sell-offs related to political risk tend to be especially fear-inducing, but they're often as overblown as the overseas declines, he said.
"My suggestion? Tune it out, please. Instead, look for companies that have nothing to do with the political fray, even as their stocks have been brought down by it," he advised. "They may be a reason to sell some stocks, but rarely has anything in Washington been enough to sell everything."
Stocks endured another bout of volatility Friday, with the Dow Jones Industrial Average losing nearly 300 points, the Nasdaq Composite dropping 2.1 percent and the S&P 500 briefly entering correction territory — 10 percent down from its record highs from September.