(MONEY Magazine) – Interest in baseball cards has exploded in the U.S. since the late 1970s. Hobbyists, investors and speculators -- not to mention bubble-gum-chewing young fans -- will buy more than 5 billion new and old cards this year. Total sales will approach $150 million. To serve this market, there are now some 10,000 dealers, including 3,500 retail shops, and at least 100 weekly swap meets. With that in mind, Marquette University finance professor George Kutner and I have undertaken a detailed analysis of this burgeoning collectible. We evaluated the investment returns from baseball cards much as we would study the performance of stocks and bonds. Our research found that the compound average annual rate of return of all baseball cards has exceeded 25% during the 1980s. My own further examination of the performance of famous players' rookie cards shows compound average annual returns in excess of 40% during the same period. (A rookie card is a major leaguer's first appearance in a regularly issued, nationally distributed card set.) Some rookie cards have increased in value, on average, more than 100% a year since 1980. These gains far surpass recent records of equities and other investments (see the table at right). It should be noted, however, that percentage returns do not necessarily translate into fortunes. A 100% gain on a 5 cents baseball card is merely a nickel. A killing is difficult because many fans never do sell and a collector cannot even begin to corner such a diffuse investment market. It is also possible, alas, that baseball cards -- many up 20% or more just since the October Wall Street crash -- may now be nearing a peak. The data used in this study come from the year-end prices from 1979 through 1987 as listed in James Beckett's Sport Americana Baseball Card Price Guide (Edgewater Book Co., $12.95) and Beckett Baseball Card Monthly. The sources used to estimate the prices include advertised buy and sell offers, dealer price lists, auction results and actual reported transactions at card shows and conventions. Retail prices on Topps Chewing Gum Co. baseball cards issued from 1952 through 1987 were used to study the performance of selected rookie cards. All prices assume cards are in mint condition -- a key factor, as explained in the ''How to Invest'' box on page 144. Some vintage cards with unusual histories now sell for huge prices almost regardless of condition. For example, a T206 Honus Wagner from a 1909-11 set, like the creased one pictured at left, sold for a record $110,000 this year. Its price is a function of scarcity more than adoration of the Hall of Fame ( Pittsburgh Pirate shortstop nicknamed The Flying Dutchman. Fewer than 100 of the cards are known to be in existence. There are two explanatory theories. One school holds that Wagner, an ardent nonsmoker, got an injunction prohibiting the card's manufacturer, the American Tobacco Co., from distributing it. Others maintain that Wagner had the cards recalled because he was never paid to appear on them. Anyone who has not bought baseball cards since childhood might be surprised at the changing nature of this investment. Twenty years ago, a pack cost a nickel. Today a wrapped group of 15 to 17 cards costs 40 cents to 75 cents. Only Topps adds its supersweet pink bubble gum as a dividend, and only in some packages. The other card issuers -- Donruss, Fleer and Major League Marketing (distributor of Sportflics and Score) -- include puzzles, team logo stickers and trivia cards. A complete annual set of virtually every player who goes to the major league spring training camps contains 700 to 800 cards and runs about $20.

THE EVOLVING CARD MARKET A historical review of the baseball card market will be instructive for prospective investors. Baseball cards were first issued during the 1880s by U.S. cigarette companies to promote business. Very few of those early issues remain in salable condition today, because most were printed on cheap cardboard and suffered from poor-quality photography. The extremely small supply and enormous demand for cards of that era make them highly valued. A 600-odd card set issued by Old Judge cigarettes in the late 1880s would sell for $50,000. When World War I led to raw-material shortages, cigarette companies gave up the premiums. After the war, baseball cards were again printed and distributed in mass quantities, this time by candy and gum companies. The new cards were superior in quality to earlier ones and issued in considerably greater quantity, typically tens of millions annually. One of the most valuable complete sets of baseball cards is Goudey Gum Co.'s 240-card collection from 1933. The set includes Babe Ruth and Lou Gehrig and might command $18,000. It also has one of the priciest cards today -- at $9,000 -- that of another Hall of Famer, Napoleon Lajoie, which is so valuable because its print order was small and was inadvertently delayed until 1934. The second era of card collecting faded in World War II when paper and rubber shortages limited card and gum production. Bowman Gum Co. resumed the business in 1948. Topps followed in 1951 and today dominates the market with more than half of total card sales annually. The first complete Topps set, issued in 1952 with 407 cards, now fetches as much as $40,000. The set is highly prized by collectors largely because it contains the Topps rookie cards of Mickey Mantle and Willie Mays, two of baseball's most popular players. For more than two decades after its 1956 acquisition of Bowman, Topps had a virtual monopoly on the card industry. Then in 1980, a U.S. district court ruled that Topps and the major leagues could not prevent other gum companies from issuing cards. A year later, Fleer and Donruss started competing. Sportflics followed in 1986, and Score jumped in this year.

EVALUATING THE ASSETS The price of a baseball card is determined, like any other financial asset, by supply and demand. While demand remains attractively high, many of the total annual printing of some 5 million cards per player vanishes within a few years. One reason is that cards are not made to last for more than several years, and creases and bent corners automatically reduce value. Thus few cards issued before World War II have survived in investment-grade condition. The supply of even modern-era baseball cards, especially those issued prior to 1981, is far less than the total number of cards printed owing to their fragility. Before the cards were viewed as attractive investments, many were thrown away or destroyed (frequently by collectors' mothers). Various external factors influence the demand, and consequently the price, for a baseball card. Among them: the year of issue (in general, older cards and ones from years with many superb rookies are especially valuable); the fortunes of the player on the card; whether it is his rookie card; the condition of the card; the popularity of the complete set; and whether the card contains a manufacturer's mistake. As a rule, the stronger the combination of these factors, the higher the card's price. For example, a mint 1955 rookie card of Dodger Sandy Koufax can be worth $250; a dog-eared 1960 card of Yankee Duke Carmel, 8 cents. Demand is also highly regional, depending on rooting interests, and produces price variations of as much as 100% for comparable players. Met and Yankee cards often sell for twice as much in New York as in Illinois, where cards of former Cubs and White Sox players are treasured.

LUCRATIVE ROOKIE RETURNS ^ I also examined the average annual rates of return for the rookie cards of four famous modern-day players: Hank Aaron, Mickey Mantle, Willie Mays and Pete Rose. The 1979-87 price performance of the Aaron, Mantle and Mays rookie cards was less than spectacular, appreciating about 10% annually, on average, with notable yearly fluctuations. The Rose card, however, steadily gained value throughout the period and would have rewarded someone who bought the card in 1979 and sold it at the end of 1987 with an average annual return of almost 40%. Why did the card of the Cincinnati Reds' current manager increase in price during 1980-82 when so many other collectibles and financial assets were weak? Or, put another way, why did Charlie Hustle run counter to the random walk investment theory? A strong probability is the extensive media attention Rose received at the time. Those were the years when he approached Ty Cobb's amazing record for total career hits, surpassing it in 1985. The 1954 complete Topps set containing Aaron's rookie card and the 1952 set with rookies Mantle and Mays also rose and fell in price during the 1979-87 period. Yet the 1963 complete set, like the Rose rookie card within, shot up in price during the study period. Clearly, the historical price performance of complete baseball card sets is highly influenced by the presence of any superstar rookie cards in the set. By the end of 1979, other admired players seemed destined for the Hall of Fame. Some examples were George Brett, Rod Carew, Steve Garvey, Reggie Jackson, Jim Rice, Mike Schmidt and Carl Yastrzemski. So I investigated what I call the Portfolio of Emerging Stars with their rookie cards and saw a striking performance. The annual average rate of return during the 1980-87 period was 42.5%! The rookie card of Mike Schmidt, the home-run slugging third baseman for the Philadelphia Phillies, increased in price from 65 cents in 1980 to $175 by year-end 1987. A 1969 Reggie Jackson rookie card leapt from $4 to $150 during the same period. Unlike the cards of established stars of the 1950s and 1960s that I analyzed, no rookie cards of these emerging stars declined in price at any time during the period studied. To determine whether it would have been possible during the 1980-87 period to earn superior returns from investing in rookie cards, it was necessary to develop a trading strategy that could identify future superstars. I relied on selections by the Sporting News. After each season, this respected weekly sports newspaper chooses four ''Rookies of the Year'' (ROYs) out of 100 or so first-year players. The rookies include one pitcher and one other player from both the American and National leagues. I collected card price data on the 28 most recent Sporting News picks following their ROY announcements and compared those with prices at the end of 1987. I treated each group of four ROYs as a diversified card portfolio, the baseball equivalent of a growth-stock mutual fund. My study shows that the prices of each portfolio increased significantly in value after its players' initial seasons. For example, the 1984 portfolio with Seattle Mariners Mark Langston and Alvin Davis, New York Met Dwight Gooden and Philadelphia Phillie Juan Samuel sold for $8.50 when the season ended, compared with pennies during the season. At year-end 1987, the same portfolio was worth $44 for a 73% average annual return. While the price appreciation of each portfolio appears impressive, it was necessary to compare the results from cards of these stars with gains from investing in 700-player complete sets during the same years (see the table on page 145). Such a comparison helped me determine whether a selective trading strategy would have been superior to the passive strategy of investing in the entire population of cards. The evidence is clear. An active strategy buying ROYs produced a significantly greater annual rate of return. While the complete sets had an average annual return of 35.6%, the ROY sets gained 44.4%. Four ROY portfolios grew at compound annual rates of more than 50%. Some investment analysts might wonder how baseball cards have performed since the stock market highs of 1987. The figures show that most rookie cards have risen in value and have handily beaten the stock market averages. For example, the 1987 cards of Oakland Athletic first baseman Mark McGwire and Milwaukee Brewer catcher B.J. Surhoff increased in value by about 15% through March while Standard & Poor's 500-stock index dropped by 20%. Cards of superstars of the 1950s and 1960s have been especially strong post-crash. For instance, the 1952 Mickey Mantle card is up about 50% to $6,000. Whether the baseball cards of rookies of the 1980s can continue generating these types of returns remains to be seen. The growing number of card manufacturers has flooded the market with new cards, which could overwhelm demand. The remarkable performance of rookie cards has also become so well < known among investors that some analysts believe prices cannot get much higher and are more likely to fall. Continued observation of the baseball card investment market will be essential.

CHART: NOT AVAILABLE CREDIT: Sources: Sport Americana Baseball Card Price Guide and the Salomon Bros. Research Investment Policy Report 1987 CAPTION: The bottoms and the Topps (1980-87) Rookie baseball cards outperformed all other comparable investments this decade. The impressive 42.5% figure represents holdings since 1980 of an ''emerging stars portfolio'' with the rookie cards of George Brett, Rod Carew, Steve Garvey, Reggie Jackson, Jim Rice, Mike Schmidt and Carl Yastrzemski. DESCRIPTION: Value of investing in baseball cards in comparison with other types of investment.

CHART: Selective vs. passive investing

Over the long term, investing in baseball cards selectively by buying only the Sporting News' Rookies-of-the-Year cards after each season has outperformed the passive investing strategy of buying complete sets of all baseball cards issued each year.

Compound average annual return (%)

Rookies- Season of-the-Year Complete issued portfolio sets

1979 66.3 31.5 1980 29.0 24.1 1981 57.1 28.7 1982 51.4 37.2 1983 33.2 48.4 1984 73.0 74.3 1985 39.4 26.5 1986 5.6 13.6

Average 44.4 35.6

CREDIT: NO CREDIT CAPTION: See above. DESCRIPTION: See above.