The sharemarket is a capricious beast. It tantalises, tempts and taunts, only to turn savage without any warning and for no apparent reason.
To understand sharemarkets, you need to understand human behaviour and, particularly, the psychology of group behaviour. If individuals can be unpredictable, as a group they can be downright irrational.
The history of stock trading is a tale of unrelenting overreaction, of boom and bust, of mood swings between unbridled optimism and the depths of despair.
It is often said the two competing forces that drive investors are greed and fear. Both forces vie for the attention of investors and, while one usually dominates, you don't have to search too far to find two investors operating in the same environment, reading the same statistics and being presented with the same forecasts, who have diametrically opposed views about the future.
That is why there always have been and always will be buyers and sellers.
And it is for that reason this newspaper is unlikely to ever run a market report that begins with the following: "There was no trading on the stock exchange today because everyone was happy with what they owned."
It is obvious that right now, fear is in the ascendancy. And while sharemarkets such as the US have experienced solid growth since round one of the global financial crisis, ours has been stuck in neutral for more than two years.
Unfortunately, it is likely to stay that way for at least another year.
The All Ordinaries Index is about 40 per cent below its 2007 peak. If you are an avid reader of stockbroking reports, you could easily be convinced that this represented a fabulous opportunity to buy, for stocks certainly are much cheaper now than five years ago. Back then, of course, you were being urged by those same brokers to hang on to your stock because "markets always bounce back". That may be true. But can you afford to wait for a decade?
While hindsight is a wonderful thing, the advice that should have been given back then was to protect your capital, to shift out of stocks and seek out safer harbours, such as term deposits and other fixed-interest products.
Once again, the portents for the coming year point to a period of instability. European leaders have shown an uncanny ability to dither and defer, to obfuscate rather than initiate, even in the face of impending calamity. In the past few weeks, both the World Bank and the International Monetary Fund have warned of dire consequences to the global economy should European leaders fail to save Greece and other nations such as Italy from default.
Add to that weak growth in the US and a slowdown in China.
That will weigh on commodity prices such as iron ore and coal, which will flow through to earnings reductions for our resource giants and exporters.
Slower growth is also likely to affect our banks, which have been powering in the past few years as they gobbled up smaller banks and non-bank lenders.
But the big four, in particular, have almost reached the limits of their domestic growth and with Australians borrowing less, they will struggle to maintain earnings momentum this year.
On top of all that, the Australian dollar is likely to remain strong, which will only add to the woes of manufacturers and exporters. At the moment, the Australian market is priced at about 15 times next year's earnings.
That's not cheap. That's pretty much the average over a 30-year period. So the argument to buy now because the market is well down on its peak of four years ago doesn't hold true.
Price earnings ratios may be the staple tool for making investment decisions but they are far from infallible.
To begin with, next year's earnings are a guess. And that guess could be wrong. Even then, profit results are an accounting construct. Many a company has gone bust after reporting solid earnings. The trick is to look at cash flow, to make sure the cash is supporting those supposed earnings.
Like any market, there will be buying opportunities in the year ahead. But they will be harder to pick. It will be more a case of seeking out well-run companies grabbing market share at the expense of others, rather than just jumping in.
If you are a 30-year-old looking for long-term growth, with decades to wait, 2012 may represent good buying. But if you are near or at retiring age, this is a time to protect capital, to ride out the storm and wait for the volatility to settle.