Cramer: I helped investors through the 2010 flash crash by following one key rule

KEY POINTS

• "Mad Money" host Jim Cramer builds on his "nobody ever made a dime panicking" mantra by explaining how investors can apply it to their portfolios.
• Keeping an even keel and planning your sell-off investments can give you a leg up, Cramer says.

In many ways, individual investors are often their own worst enemies, as CNBC's Jim Cramer has learned over the years.

"If you want to invest wisely, you constantly need to be fighting off your own worst impulses," the "Mad Money" host said. "We're not robots, we have emotions, and those emotions can really throw you off your game."

That's why Cramer is always drilling down on one of his most important rules: "Nobody ever made a dime panicking."

Yet no matter how much he repeats it, Cramer sees sellers come out of the woodwork any time an individual stock or the overall market takes a hit.

Now, if you were an ancient hunter-gatherer and came across a grizzly bear, the instinct to panic and flee would come in handy, the "Mad Money" host said.

"But it's not a useful emotion when it comes to analyzing the stock market, where you're running away when maybe you should be running toward" stocks, he said.

"The truth is, there will almost always be a better time to sell than in a panic, a better time to leave the table than whatever moment inspired you to panic in the first place," he added.

Cramer put this strategy to work in 2010 during the market's flash crash, when the Dow Jones Industrial Average fell almost 1,000 points in less than half an hour.

Naturally, investors panicked, dumping their stocks as part of a mass selling frenzy. As Cramer watched the ticker tape while he was on live TV, he couldn't believe what he was seeing. It looked like people were selling for no reason other than to sell.

"I urged viewers right there on the set to pick a stock they loved and buy it using limit orders, so you wouldn't have to accept a price you didn't like," Cramer said.

"The result? To this day, people still come up to me and thank me for that advice during the flash crash," he added. "But I simply put my rule into practice, realizing that nobody ever made a dime panicking, and then I tried to help you profit from it."

'Ignore emotions'

Keeping an even keel and planning sell-off strategies ahead of time can help investors buck the panic and make smart choices when stocks are on sale.

And while Cramer's not saying that investors should buy every stock on their most wanted list every single time there's a sell-off, there is value in occasionally swimming upstream.

"The next time there's a big, market-wide sell-off and you feel like fleeing and never touching a stock again, I want you to do something for me. I want you to take the opposite side of your emotions, the opposite side of the trade," Cramer said. "Take a deep breath and wait for the rebound before you sell."

Another cardinal rule is to stick to your essential stocks when the market endures big declines.

"When the stock market gets unrelentingly negative, remember that he who defends everything defends nothing," Cramer said. "What exactly does that mean? It's about how you evaluate your holdings."

Investors can't possibly hang on to every stock they own during a big decline, Cramer said. Some stocks just won't fit the new environment and will hurt you if you don't sell.

If you treat every single decline as a buying opportunity, you'll quickly waste all your cash building positions, and end up unprepared for future declines.

The solution? Get selective, the "Mad Money" host said. Pick the best stocks to buy into weakness and sell the rest to raise cash.

"Great investors know how to ignore their emotions when those emotions get in the way of making money. So the next time the market gets slammed, don't panic — nobody every made a dime by panicking — but also don't double down just with your eyes closed on the whole portfolio into weakness," Cramer concluded.

"Vicious, negative markets can give you buying opportunities, but you need to focus your capital on your absolute favorites rather than chasing bargains in lower quality merchandise when it turns out they weren't bargains at all."

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