For every genuine `wonder stock' that crops up there are always plenty of opportunities to jump on the bandwagon after it has started rolling. You don't need to be there are the beginning to make a packet of money

INVESTMENTS

This is the time of year when the statisticians come out of the woodwork and give us their annual "what might have been" lecture. We will hear a lot in the next ten days about where we should have put our money this year if we had wanted to maximise our returns.

Newspapers and stockbrokers produce lists that summarise which shares did best, and how the various asset classes (equities, bonds, property and so on) have fared over the last 12 months.

It is best to approach this annual, unforgiving exercise in a spirit of due humility. Hindsight is a wonderful thing, but as one well-known investor of my acquaintance puts it: "Anyone who drives a car with their eyes firmly fixed on the rear-view mirror is likely to end up hitting a wall."

There is only so much of value you can learn from how things turned out in practice; and even less from aspiring to find the best of all conceivable investments in a year when above-average performance would have served you more than adequately. As long as you avoided property and gold, and steered clear of construction shares and emerging markets, you will have probably have done fairly well in 1995, whatever you did.

I dare say that you, like me, were one of the millions who missed out on British Biotech - this year's best-performing share (up just over 200 per cent) - which may turn out to be what a number of excitable brokers are already calling the next Glaxo. Well, the only correct response to that is "too bad." There are worse disappointments in life than missing out on the early rise of a good share, even one which had discovered a potentially world-beating drug.

If you are one of those whom this does worry, experience suggests that the way to console yourself is to remember two things.

One is that every gain in the stock market has to be measured against the risk involved. Few of us have the time or the knowledge required to find out what British Biotech does, let alone to appreciate the commercial significance of any new compound it may have discovered. Investing in the company at this stage, before commercial and regulatory trials have established what its drugs can safely do, is a high-risk strategy. Those who are prepared to take on that risk have earned their 200 per cent gain. It does not mean that you should necessarily join them.

The second consoling thought is that for every genuine "wonder stock" that crops up, there are always plenty of opportunities to jump on the band wagon after it has started rolling. You don't need to be there at the beginning to make a packet of money out of it.

With the benefit of hindsight, you would need to have started buying Glaxo shares in the 1970s in order to maximise your return, but anyone who latched onto it in the 1980s - long after its ulcer drug Zantac was known about and indeed had started to be sold commercially - could still have done handsomely out of it. The shares have risen by the best part of 50 per cent this year alone, thanks to the success of the Wellcome takeover, which looks like turning out to be one of the corporate steals, not just of this past year, but of the decade as well.

Scanning through the lists of the most successful investments in 1995, two other things strike me. One is how confounded the so-called experts have again been this year. The consensus of opinion among professional forecasters this time last year was, by and large, that this was going to be a fair but tough year for financial markets, with strong economic growth likely to require higher interest rates, particularly in the United States. I personally remember listening to one highly regarded US economist - a man with formidable connections in New York and Washington - confidently predicting in February that the Federal Reserve would have to raise US interest rates at least twice before the autumn to choke off demand.

In fact, not for the first time, the reverse of what the pundits expected has happened. Both the Fed in the States, and to a lesser extent European central banks, have all found themselves struggling to cope with a rather different phenomenon, namely a worrying slowdown in their economies which has left them cutting rather than raising interest rates. If there is one fundamental story in investment this year it has to be the general decline in interest rates over the past year. The Fed, the German Bundesbank and the British authorities have all cut their rates in the last two weeks. While modest in themselves, when combined with earlier cuts in the cost of money, the cumulative effect has been highly significant.

What is more, in addition to the short-term rate changes made by governments and central banks, there is also an even more profound force at work - which I believe is also the second main lesson to be drawn from the year's events in the markets.

The interest rates that the authorities can control directly are short term ones. But what really matters to investment markets are long-term interest rates. They ultimately determine how shares and other classes of financial asset are valued. They reflect what investors expect to happen over time to inflation and economic performance.

Governments cannot influence them directly. This year the yield on the US long bond - a 30-year government bond - has fallen sharply from 8 per cent at the start of the year to just over 6 per cent now. It means that the long bond yield, which peaked at over 12 per cent in the early 1980s, continues its long-run secular down trend. Last year's crisis in the bond market now looks like an aberration, and there is no sign that long-term interest rates have yet reached the bottom.

In real terms - after adjusting for inflation - long-term interest rates remain above the 2 per cent to 3 per cent level that was the norm in the 1950s and 1960s, so there may yet be room for further falls now that the inflationary horrors of the 1970s are finally being purged from investors' memories.

It is this decline in long-term interest rates that has helped to give us the extended bull market in shares that we have experienced since the early 1980s, and the message from the past 12 months is that this unprecedented period of positive stock market returns has not yet come to an end.