Cramer's 'Mad Money' Recap: Invest Like a Pro

Market players should always want to have cash and if they don't, they need to sell something, Cramer said. "This is one of the most alien and difficult concepts for most ordinary investors to understand," he said. "Nonprofessionals think it's right to be fully invested. I'm a champion of stocks, but that's totally, 100% wrong."

People need a reserve so that they can profit from declines in the market, Cramer explained. As the market will always have pullbacks, people will always need cash. "It's there so that you can take advantage of a selloff by purchasing your favorite stocks at much lower prices," he said.

About 10% of an investor's portfolio should be cash, Cramer said. Once it's at 5% cash, "there's only one circumstance where it's right to use that cash to buy stocks" and that's when the market has taken a big hit, "a decline of at least 10% from the peak before the decline to the trough."

People can use the decline to pull out their shopping list of stocks they want to buy and pick up their favorite pieces of stock merchandise on the cheap, he said. "That 5% cash reserve is there to prepare for these truly massive declines and if you use it for anything else you'll regret it the next time the market tanks."