Cramer's 'Mad Money': Staying in the Game

Once investors have decided how many stocks to research in their portfolios, he said the stock they should pick should be one from their neighborhood, a local name that can relate to.

Second, Cramer said a portfolio must include a defensive, recession- resistant company. Third, investors should consider a high-quality cyclical stock. Next, Cramer said investors needs a high quality brand name stock in the mix, along with a financial stock.

Rounding out a well balanced portfolio should be a speculative stock, said Cramer, something to add some excitement.

He said there should also be a retailer in the portfolio, a tech stock, an energy play, and a gold stock.

He said none of these stocks should account for more than 20% of a portfolio.

Timing Is Crucial

Investors looking to get the edge on Wall Street need to understand one thing, said Cramer, and that's the business cycle.

"It's huge," he said, "50% of how a stock moves depends on the sector it's in." He said the reason for this is that big fund managers are committed to sector-based thinking, and they're the big buyers and sellers that set prices.

Cramer explained there are two types of companies: cyclical ones that do well when the economy is growing, and secular companies that aren't sensitive to the strength or weakness of the economy. It's the secular names, he added, that are the ones to own during a recession.

Cramer said that at the top of the business cycle, right before the Federal Reserve is about to raise rates, that's when to buy the secular names. And at the bottom, when people can see the light at the end of the tunnel, is the time investors should swap out of those names and back into the cyclicals.