Cramer's 'Mad Money' Recap for Aug. 7

A smart investor will examine this list with total honesty, Cramer said. "When you get hit with a big selloff, that's going to change ratings." During that time, it's important that investors re-evaluate their positions.

"In a selloff, you don't want to sell nothing and buy more of everything. That's reckless," Cramer said. It's not panicking to sell members of the third and fourth groups, and if investors sell them at the beginning of a decline, they'll be a lot better off. It's important not to try to tough out a bad day with the least appealing stocks in a portfolio.

During a bad day, investors should shift their capital to stocks on the first and second lists. The money to buy those stocks will come from selling the stocks on the third and fourth lists, Cramer said. When the market gets hit hard, investors should throw out their worst stocks and "circle the wagons" to buy the best stocks.

Buy Broken Stocks, Not Broken Companies

A selloff is full of "opportunities to buy good companies whose stocks have become bad," Cramer said. "In a really serious correction, almost everything will go down." That's when investors should look to be getting into attractive stocks.

"Certainly, a lot of stocks that don't deserve to go down will decline alongside those that do deserve to go down," Cramer said. It's important to be able to "discern between a broken company and a broken stock."

Cramer pointed to the selloffs of 2007 as an example. During the collapse of companies that issued mortgages, particularly those that had bonds, a credit crisis emerged, and along with that came selloffs. This hurt the financials and the homebuilders.