Cramer's 'Mad Money' Recap: Surviving a Tough Market

Buyer Beware

There's a dangerous word being tossed around the markets, said Cramer, and that word is "cheap." He told viewers to beware of anyone using the word cheap because cheap, he said, can get you killed.

Cramer said that it's natural to assume stocks are cheap after the markets have fallen thousands of points in just weeks. But, he asked, "Do we want to own stocks that look cheap, or stocks that can go higher?" He said the worst reason to buy a stock during a downturn is because of valuation.

Cramer said in a bear market, and especially in a panicked market, the old equation of earnings times multiple equals price gets thrown out the window. Why? Because in a bad economy, no one knows what the earnings will be, he said. Without earnings, there can be no multiple, and without a multiple there is only free fall.

Cramer said this premise is especially true for cyclical stocks. These companies need a strong economy to make money, he explained. In a downturn however, these same companies can turn from a profit to a loss in the blink of an eye, all while the "estimates" are still way too high, making them look cheap. Think Bethlehem Steel in the 1980's, said Cramer.

The bottom line: When investors seem to be selling everything hand over fist, looks can be deceiving, and cheap can get even cheaper, he said.

The Power of Hedge Funds

Cramer said another tip for owning stocks in a downturn is to "know thy fellow shareholders." He said in nasty environment, who owns a stock is almost as important as the stock itself. "Your fellow shareholders," he said, "can become your worst enemy."