INVESTMENTS

What is the single most futile activity that private investors can engage in? One answer is simple: worrying about the state of the national economy. The amount of time and effort devoted to analysing where the economy is at any one moment is quite out of proportion to the rewards.

There are many reasons why this should be so, but it remains a lesson that many investors find hard to take on board. As there clearly is a correlation between the behaviour of the stock and bond markets on one hand, and the development of the economy on the other, it is natural to assume that the key to the first lies in mastering the second.

Most investors know that the markets and the economy move in cycles, with the latter typically lagging the former by anything between 18 months and two years.

The financial markets' function is not to reflect where the "real economy" is today, but where it will be in the future - the stock market, in the traditional phrase, is "a barometer, not a thermometer".

Professional investment firms pay huge sums and devote immense amounts of time and effort to forecasting how the economy is going to develop in the short to medium term. Some do it better than others - though none does it with any consistent degree of accuracy. But there is no reason why individual investors have to try to do the same.

The message that analysing the state of the economy is a futile endeavour is one that many successful investors happily reinforce. For example, Peter Lynch, who ran Fidelity's Magellan fund in the 1980s, and under whose guidance it became the biggest mutual fund in the United States, says the amount of time he spent each year on general economic trends was "about 10 minutes". Other successful investors, such as Sir John Templeton, take exactly the same line.

Recent experience has underlined yet again how right they are. For if last year was one that confounded most of the economic forecasters, this one has been just the same. Even now, nobody knows for certain how fast the UK economy is slowing down or how close it is to operating at full capacity - if it were clear, there would be no dispute between the Chancellor and the Governor of the Bank of England over what to do with interest rates.

Nor would the Chancellor's so-called Wise Men, his panel of six independent economic forecasters, be so hopelessly split over this issue. Three of them think interest rates should go up, and the other three think they should stay where they are, or even be reduced. The economic fraternity cannot even agree on what the official economic statistics that do come out actually show - not surprisingly, since they are so often revised subsequently.

Our official statisticians are among the best - and certainly the most honest - in the world, but that does not make the figures they are required to produce reliable. The Financial Times pointed out the other day how vulnerable the figures can be to subsequent revision. How fast, do you think, did the economy grow in the second quarter of last year?

Well, the first provisional estimate published by the Central Statistical Office was 0.7 per cent. Four months later this had been revised up to 0.9 per cent. Four months later it went up again, to 1.1 per cent. Then the estimate was reduced to 1.0 per cent, and finally brought down again to 0.9 per cent. That is the current official account of how fast the economy grew in early 1994.

Bill Martin, an economist at the broker UBS, points out that there are similar difficulties with the retail sales figures and the level of capital investment in the economy. The Treasury and the City economics fraternity are both - rightly - worried about the relatively low level of capital investment by industry in the current up phase of the economic cycle. It has important implications for the future course of interest rates, inflation and unemployment.

Yet they were also worried about it last year, when the provisional estimate was that manufacturing investment had risen by a weedy-sounding 2 per cent. Yet since then, Martin says, the official estimate has been trebled to 6 per cent, a difference that can be measured in billions of pounds. Anyone who rushes to judgement on the strength of the current economic data, in other words, is liable to be disappointed by the outcome of events.

Fortunately most investors do not need to give themselves ulcers by trying to get right what even the most expensive professionals so often get wrong. The markets themselves tell you a good deal about where current expectations for the economy's future course lie: the yield on index- linked gilts, for example, is as good an estimate of real interest rates a few years out as you can buy from a professional economist.

But more important for those who are genuine investors, interested in building some long-term wealth, rather than chasing short-term profits, it is the quality of the companies you invest in, not the state of the economy, that will determine how well you do over time.

The value of a good company will rise and fall with the state of the markets as a whole. But it will continue to grow in value over time if the underlying economics of its business is sound. What is happening in the make-believe world of the economics statistics is largely irrelevant - and certainly not worth worrying about. Take it from Mr Lynch, please.