You won't make money, so make love . . .

That, more or less, is the advice of the billionaire Warren Buffett: even if the Iraq war ends quick

Once the shooting starts, the stock market will wobble again like it did earlier this month, when it lost 6 per cent on Wednesday, falling to an eight-year low, only to climb back 15 per cent by the following Tuesday. "Wobble", by the way, is intended to suggest movement in one direction then the other, without trying to predict whether shares will move up or down first or whether they will finish the coming week higher or lower. Frankly, your guess is as good as mine - and at least as good as that of the overpaid City pundits who have misforecast the FTSE-100 index for the past three years.

Stock markets are about as predictable as shoals of tiny tropical fish, darting hither in greed and thither in fear, sometimes dodging a shark, sometimes dodging a shadow they think is a shark; sometimes sensing nutritious algae ahead, only to find worthless clouds of sand; sometimes seeing all these things at once and displaying no collective sense of direction at all. Stock markets have no more idea than you or me about what is going to happen to Saddam Hussein, or Tony Blair, or the global economy, or the behaviour of shoppers in Marks & Spencer. They just guess wildly, correct themselves, and guess again.

What's more, the stock market does not even know what is going to happen to the stock market. Asked whether the FTSE low of 3287 marked the end of the bear market, equity strategists could offer little except cliches about "the fat lady singing" - or not singing, as the case may be. Only one - Simon Davies of Threadneedle Asset Management - was honest enough to admit that he had not "the foggiest idea" how shares will behave in the short term. "You'd be barking mad," he went on, "to think there was no risk involved in investing at the moment."

But millions of us are investing at the moment, whether we like it or not, through corporate and personal pension plans, unit trusts, ISA accounts and bombed-out shares that we already happen to own.

It would be comforting to have a clue whether we can expect to feel richer or poorer by this time next year. So let me try to demystify the arguments on both sides.

The case for imminent market recovery is based on the simple argument that shares have fallen far enough, for long enough, to address all the negative factors that started the fall. The FTSE index has been dropping for more than three years, which is longer than any bear market since the 1930s. It has lost half its value, which means that shares now trade at price-earnings multiples (the ratio of a company's share price to its expected profits per share) of 16 times, which is close to the long-term average.

Shares also offer dividend yields above 4 per cent, compared to only 3.3 per cent on government stock - the first time since the 1950s that equities have offered better income than gilts.The yield is a reflection of the perceived risk: the higher the risk, the greater the return the investor expects. The relatively low return on gilts reflects the investors' belief that governments, which cannot go bankrupt, are still a safer haven for money than private companies.

Meanwhile, optimists say, share prices are more than usually out of touch with reality: things are just not that bad. The British economy is still growing, albeit slowly; inflation is under control; unemployment is low. And the war in Iraq could be done in a month - the rally of 13 and14 March was prompted partly by trading-floor reactions to rumours that Iraqi battalions are ready to surrender en masse. If that turns out to be true, the oil price will swiftly drop back to a comfortable $20-$25 a barrel (in recent weeks it moved to above $30) giving growth an immediate boost. We will be back to business as usual, and share buying will be in fashion again by Easter.

But then there is the opposite case: the market's nadir is still to come. IG Index, a spread-betting service popular with City types, is indicating that the FTSE will fall to 2780 before it finally rises again. Some pundits put the bottom below 2000, pointing out that, in percentage terms, the index has to fall to 1884 to match the bear market of 1972-75.

Behind this pessimism is the realisation that the global economic woes that were depressing markets before George Bush decided to start a war will still be there after he wins it. The diplomatic drama of recent months has distracted us from America's trade deficit, Japan's deflation, Europe's sclerosis and our own soaring levels of household debt. We have forgotten that corporate America is so discredited by Enron and other scandals that investors no longer believe profit figures, or anything they are told by Wall Street analysts.

We have ignored the dangerous exposures built up by traders in derivatives, the complex instruments recently described by the American billionaire investor Warren Buffett as "weapons of financial mass destruction" (see Patrick Hosking, page 33). We have overlooked the fact that, on historical comparisons, US shares are still strikingly overvalued - at a price-earnings ratio of 27, compared to a long-term average of 17. They could easily dive in response to more corporate scandals, another terrorist outrage, or a setback in Iraq. And if US shares dive, British shares will, too.

They may dive again anyway, if a major life assurance com- pany declares itself insolvent and defaults on its obligations to pension policy-holders - a disaster that is daily more likely while the values of the assur-ers' share portfolios remain so depressed. Shares will dive if FTSE-100 companies' profits fall far below forecast because cash has had to be put aside to fill an estimated £65bn black hole in their own pension funds.

Prices will sink if Tony Blair loses his career gamble on Iraq and is succeeded by Gordon Brown, a socialist (as the market sees it) with no apparent sympathy for private investors, pension funds, or companies struggling to make profits. While Blair remains in post, prices could plunge in response to the Budget in April, which is expected to contain lower growth forecasts and more tax rises.

So what should we expect shares to do next? The best synthesis of history and punditry I can offer is that the rally in the run-up to war will be followed by a period of extreme volatility while fighting continues, a euphoric surge when Saddam falls, a jittery fall to a new low when the world realises what a mess it is in afterwards, and a long, slow recovery beyond that.

Don't expect the FTSE 100 to regain its 1999 peak of 6930 for a decade; don't invest in anything you don't understand; and remember the wisdom of billionaire Buffett: "Money can't change how many people love you."