The Year It Paid to Buy Bonds

By Janice Castro

But the rewards for collectors were mostly intangible

The markets for everything from Chinese ceramics to Government bonds last year provided a classic case study of what happens to investment values when interest rates and inflation begin to slide. Collectibles, which once glittered in the glare of rising prices, assumed a certain dowdiness, while the stock market won the spotlight as it pierced all previous tops. But the real stars were bonds.

Bonds had their best year ever. According to Salomon Brothers, the return on high-quality long-term corporate bonds was 44%, counting price appreciation and assuming that interest was reinvested. U.S. Government bonds, one of the safest investments around, returned 41%. Next to that, the 20% rise in the 30 Dow Jones industrial stocks seemed almost anemic.

In every other sense, it was a great year for stocks. The Dow industrials, which in the past few years have generally underperformed the broad market indicators, did best. They beat the indexes for the New York Stock Exchange (up 14%), the over-the-counter market (up 19%) and the American Stock Exchange (up 6%).

The swiftest gainer on the N.Y.S.E. was actually not a stock but a warrant, a security that gives its owner the right to purchase a stock at a set price over a period of time. The winning warrant was for Chrysler Corp., at $13 a share until 1985. As the year started, Chrysler stock was selling at 3 3/8, so that the opportunity to buy a share at 13 was not worth much: the warrant sold for 1 1/4. By year's end, however, Chrysler shares had gunned ahead to 17 3/4, and the warrant was trading at 9 1/8, a 630% rise. Chrysler's stock, up 426%, was the second best on the exchange. Shares of other automakers also fared well: American Motors and Ford Motor Co. more than doubled, and General Motors rose 62%, from 38 1/2 to 62 3/8.

The No. 1 stock on the N.Y.S.E. was Coleco Industries, the videogame manufacturer, even though it ended the year 28% below its 1982 high. Coleco, the creator of Donkey Kong, absorbed a swift kick in December after Warner Communications, owner of Atari, projected a fourth-quarter slump in earnings caused by disappointing videogame sales. Coleco suffered in the ensuing market selloff, but then it bounced back. Having started the year 6 7/8, the Stock wound up at 36 3/4. By last Friday, it had risen another 5%, thanks to Coleco's announcement that 1982 earnings could be quintuple those of 1981.

The big winner on the over-the-counter market was Millicom, which is involved with the cellular technology that threatens to put a phone in every car. Millicom sold for less than $2 a share a year ago, but it rose smartly. Then last month the brokerage firm of Dean Witter Reynolds began to recommend it. That helped lift the shares to 22 before the brokerage house learned that it could not legally solicit sales in some states. With that, Dean Witter brokers stopped pushing Millicom, and the stock dropped. Millicom still managed to end 1982 at 15, up 728%. Last week Dean Witter announced that it would make up losses to customers who purchased the stock in the week after the recommendation.

The big losers in all three markets were oil-drilling and oil-service stocks. The global glut that drove down crude prices also explains the comparatively meek rise in the Amex index: it is loaded with oil stocks. Its best stock last year, SMD Industries, makes picture frames and stationery. The shares rose by 592%, mostly on the strength of SMD's rights to make school supplies and stationery bearing the likenesses of two of the year's heroes: E.T. and Pac-Man.

Investors did not have to pick the winners all by themselves. Holders of shares in 257 of the 526 mutual funds ranked by Lipper Analytical Services beat the Dow in 1982. The best record (an 81% return) was turned in by Oppenheimer Target Fund, which was also No. 1 in 1981.

Investments in tangible items were far less rewarding than bets in the financial markets. Real estate prices failed to keep pace with the Consumer Price Index, which was only 4.6% higher in November than a year earlier. The median price of a single-family house went up less than 4%, from $65,900 to $68,200. An acre of Iowa farmland, reflecting the slump in agriculture, dropped from $2,147 to $1,801. Explained Robert Jolly, an Iowa State University assistant professor of economics: "The major buyers out there are other farmers." And many of them had trouble holding on to their own farms last year.

Prices of other inflation hedges were also trimmed. A flawless one-carat diamond fell from $26,500 to $19,500. Coins, stamps and Chinese ceramics declined in value. Interestingly, precious metals did not. By the end of the year, gold was selling for $448 per oz., up from $400, and silver had risen from $8.25 to $10.90. One explanation: fears among some investors that efforts to lift the world economy out of recession will set off a round of hyperinflation.

--By Janice Castro.

Reported by Mary Earle/New York

With reporting by Mary Earle This file is automatically generated by a robot program, so viewer discretion is required.