Cramer's 'Mad Money' Recap for July 18

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."

Moving on, the next mistake an amateur makes is that when he looks at a stock, he thinks about what his upside could be, Cramer said. Pros don't do that. They think about what their downside is. "If you take care of the downside then the upside takes care of itself," he said. "That means you need to spend a lot more time considering what you can lose in a stock than you do thinking about what you can gain."

Market players have to expect their stocks to go lower sometimes, Cramer said. Instead of clinging to their "bullish case for owning the stock," it's important for people to consider the potential downside and what protections are in place.

"A company with a big buyback is a company with a big cushion, because you know there will always be a buyer for the stock," he continued. "That limits your downside."

Dividends are so important, too. "We don't like dividends for the income they provide," he said. "The reason to be attracted to strong, increasing dividends is that they limit your downside and your downside is what you have to be thinking about."

When people are interested in buying a stock, they already know the bull case for it. They know why the stock deserves to go higher and have a thesis of how that will actually happen. "There's no reason to think about upside beyond that," Cramer said. "Plenty of stocks have great upside potential, but far fewer have great downside protection."