Corrections are as inevitable as rain, according to CNBC's Jim Cramer. Investors should always prepare themselves for corrections, Cramer said.
"I expect it to rain, I prepare for it. When the rain comes, I'm ready. I have an umbrella or a coat, or I stay indoors," he said. "That's how you need to approach the possibility of a pullback in the market. Sooner or later, we're going to get one, so best have some cash ready on the sidelines — just in case that time turns out to be now."
The most important time to worry about a correction, Cramer explained, is when no one else is concerned. Brutal, supposedly unexpected declines usually come when everyone else is feeling euphoric, he added.
At his former hedge fund, Cramer would always pull back if he felt his performance was "swinging too much to the upside," he said. Sometimes, he'd quickly sell stocks to prepare for a decline. Cramer admitted he may have bought everything back days later if the downturn didn't come, and he may have felt a little foolish. His clients, however, thought he was "a genius" when things did turn sour, and his portfolio continued to perform well, he said. According to Cramer, this was not genius at all; it was discipline and preparation.
Another key component of realistic investing is to never make decisions based emotions, especially hope, Cramer said.
"Don't hope for anything. Hope is emotion, pure and simple," he said. "And this is not a game of emotion, or at least, not your emotions. Every stock you own because you hope it goes higher is another position in your portfolio that's not being filled by a stock that you believe will go higher."
Hope in the stock business is always a mistake because it supplants reason, Cramer warned. Investors should put their money in a stock because they truly believe the company will be successful, not because they hope it will, he said.
"It pays to be realistic in this business," Cramer said. "So, prepare yourself for corrections. Big pullbacks are like rain; they're inevitable. And whatever you do, don't make stock picking decisions based on hope. You need to invest in the real world, not in the fantasy land."
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