There is a fascinating story of the meltdown of the Long Term Capital Management Company (LCTM) in the book "When Genius Failed" by Roger Lowenstein.

They lost 4.5 billion (with a capital B) dollars in 5 weeks. Two founders were Nobel Prize winners and owners of the company as well as many other Wall Street geniuses. Their trading strategy was perfect (well, almost). They had leveraged their portfolio to 80 to 1. Even the slightest move in the market caused tens of millions to change hands daily. During one day their account dropped over $250 million.

For a trader or serious investor this is interesting reading, but it won't make you any money although it might save you a bundle. Having been a floor trader and former exchange member for 17 years I saw more than numbers and trading strategies. I could not do what they did even if I knew how because it takes a special mindset.

There is no question those guys were geniuses at what they did even all the way to end. It was their thinking that broke them. They were like a horse with blinders and could not see or be aware of threats that could bury them. That unplanned catastrophe did them in. They had been caught in a whirlpool of their own making.

Here is where it gets scary. Today there are huge pools of money all over the world in mutual funds, hedge funds, pension plans, state and federal retirement accounts run not by geniuses, but rather by Wall Street-trained thinking that has made no plan for a bear market. During past years we have seen the NASDAQ fall 75% and the DOW & S&P drop 40%. This recent rally has gotten back some of the losses but, it could easily drop more from here.

So far from what I can tell a very small percentage of tax-sheltered plans (401K, etc) have sold few of their losing stocks or mutual funds. Have any of these people made any plans as to what to do should this be a secular bear market last for years? The last secular bear we had saw the DOW lose 89% of its value. That was a long time ago in 1929 -31 and can't happen again - really? When you look back into history you will find that bull markets have a way of returning to their starting points. This bull started in 1974 at DOW 770. Don't worry. This time it's different. Where have I heard that before?

Here is the scenario that has not been voiced - yet. As the stock market goes lower and lower more and more investors will sell until the market becomes a waterfall of equities. There will be few buyers and many sellers. The puzzle pieces for this catastrophe are all there right now. The timetable for its occurrence has not been written.

Almost none of the financial managers today have any experience with bear markets and have no idea how to protect client money.

Forget the SEC (Securities and Exchange Commission). If they are aware of the possibility of mass exodus from the securities market they are not doing anything about it. Mutual fund managers are required by their charter to keep a large portion of their portfolio invested even if it means buying stocks they know have no value. They give the excuse that the long-tern horizon is excellent for this-or-that company. That will not help the hapless investor when he comes to retirement and his money has shrunk to cans of dog food. No more filet mignon. Many funds will not allow their managers to buy T-Bills when there is nothing worthwhile. This is something the SEC should do, but probably will not until after the fact.

Lowenstein's book points out that the LCTM partners refused to believe their thinking could be wrong. They believed in diversification and thought that meant many positions rather than different approaches. They basically had thousands of trades all doing the same thing in many countries and markets. They refused to see that what was happening to them had happened many times before

In today's investment market thousands of financial and fund managers refuse to realize that a secular bear market has seized not just the U.S., but also the entire world. Unfortunately, there is nothing to buy and hold "for the long term". I have written in my weekly financial column that mutual funds are dead - they just don't know it. They only work in a bull market. For the next 10 years or longer fund owners can look to decreasing fund values. Even the few fund managers who realize this will be handcuffed by their fund's charter and they won't be allowed to buy bonds to protect their investors or to take short positions. Eighty percent of mutual funds will disappear.

As a market drops lower and lower more and more sellers will become active. The real horror will be when (as they always do) the majority decides to sell all at the same time. Now what does the poor fund manager do when he needs cash for redemption? The junk and thinly traded stocks in his portfolio cannot be sold because the offers are so far below the market. Twenty and 30% bids under the market will be common. Financial managers will have to sell "good" stocks like IBM, GE, Microsoft and you-name-it and these will see major declines until the selling is exhausted. It is not going to happen over night and could take years before a bottom is reached and a new base is made.

When will this happen? It has been 14 years from the top in Japan's bear and there still does not seem to be any bottom. Now the real P/E ratio is about 18 for the S&P500. The mean has been 12-14 and when markets break they always go to extremes. How about 6? It has been there before more than once. Where does that put the DOW and S&P? Your guess, not mine, but some analysts (not many are brave enough) predict a loss of 62% from here. Unless you learn to sell you could be wiped out.

When you know you are absolutely right is when you experience your greatest losses. The LTCM traders had so much invested (and had tunnel vision) they could not get out if they wanted to. Mr. Average Investor won't rock the market with a 10% stop-loss order from the high of the move in his mutual fund. (Make it 8% if there is a 2% redemption fee.) The first law of the investment jungle is to protect your money. Brokers will argue that you should not sell, but with the experience of 2000 recently behind us it is clear to see that is wrong.

As the market drops into the next crater of losses (like now) you will be fat, smart and happy in cash. One thing Wall Street will never tell you is that cash is a position. If the market breaks 50% you will be able to buy back twice as many shares. Don't believe another one of the lies that you can't afford to be out of the market. Being out during a bear phase is what I call a reverse profit.

The most important thing about investing is you must be able to change your mind. Every successful professional investor knows this. He does not fall in love with his positions and is constantly reviewing whether he should hold or sell. The LTCM principals could not believe they were wrong and refused to face the reality of what the market was telling them and almost caused a world banking crash. Never mind the world; think about you own account.

Now is the time to take a close look at your investment portfolio.

Albert W. Thomas has spent most of his life in the field of finance. In 1965 he founded an insurance holding company, Security Dynamics Investment Corporation, after having been an agent and General Agent for several life insurance companies. In 1970 he became cofounder and president of Real Life Estate, Inc., that marketed a unique real estate and life insurance package.

After he became interested in commodities he bought a seat for his personal trading on the Chicago Open Board of Trade, which is now known as the MidAmerica Commodity Exchange. Later he became a full time trader and also acted as a commodity broker for a few select clients. By fellow floor traders Al is considered to be an excellent technical analyst much of which is outlined in his book "If it doesn't go up, don't buy it!" It became a best seller on Amazon.

He founded World Trading Group in 1984 and that grew to the seventh largest commodity brokerage firm in the U.S. with 35 offices from coast to coast, Alaska and Canada. It was sold in 1992.

Al is a graduate of Northwestern University with a B.S. degree in Commerce and is a member of MENSA. He is now president of Williamsburg Investment Company, which syndicates his weekly financial column since 1999 to more than 300 newspapers and writes a financial market letter called "Over My Shoulder" that is quoted in Barron’s and many other publications. A 3-month trial subscription is available on his web site - www.mutualfundmagic.com. He is a regular guest on several financial radio talk shows.