For investors, October is the cruelest month. In October 1929 the market crashed and set off the Great Depression. In October 1987 stocks lost a trillion dollars worth of value in three days. Ouch!

But how did stocks get all that value in the first place? That's the big mystery to me. I can understand why a pastrami sandwich has value, or a bicycle, or even gold. But stocks?

Stocks have baffled me for years. When I first moved to the United States I fell in with a group of people who wanted to start a restaurant. We went to see a lawyer. During the session the lawyer spun some fanciful tale about how we could raise money by selling pieces of paper "representing" ownership in our restaurant. The people who bought these things, he said, wouldn't be entitled to work at our restaurant, or eat there for free, or put new dishes on the menu, or do anything a real owner might do. They'd get dividends at intervals, but only as much as we chose to pay.

We walked away from that snake-oil salesman, wanting no part of what sounded like a pyramid scheme. I was young and clueless then, you see. I'm older now, and I own stock myself--but I'm still clueless. Why do stocks have any value at all? When you get right down to it, what are they really?

Encarta agrees with my lawyer's definition. Stocks are "certificates representing shares of ownership in a corporation." Owning them confers three privileges.

1. You get dividends. Or not. No corporation is compelled to pay dividends to common stockholders. In any case, it's a thin benefit. I checked out eleven "blue chip" companies in the Dow Jones index. The highest dividend I found was GM, currently paying 3.2 percent. Be still, my heart. Most of the blue chips are paying half a percent or less in dividends. Let me go out on a limb here: few people buy these stocks for the dividends.
2. You get to vote for officers of the corporation. What does this amount to? For most investors, it means that once a year or so, you have to fill out a form saying "don't care" to a list of people you've never heard of, who are running for a job doing you-don't-know-what. Permit me to go out on a second limb here: few people buy stocks in order to vote at shareholders meetings.
3. If the corporation goes belly up and everything it owns has to be hawked at a garage sale, you get a share of any assets left over after the sharks have feasted. 'Nuff said.

No, when all is said and done, it still looks like a shell game to me: people want stocks because stocks go up in value; and stocks go up in value chiefly because people want them. The system works as long as we all buy into the underlying premise--that "representing ownership" is the same thing as "ownership."

If we could do this with food, we'd put a quick end to world hunger. But no one seems able to treat a "certificate representing food" as food itself. How come we submit to this delusion with stocks? It was a gradual process.

How Stocks Were Born
The Stock Exchange: Its History and Functions, by Victor Morgan and W. A. Thomas, places the (more or less accidental) invention of stocks around the 16th century. In western Europe back then, charging interest on money was called usury and it was prohibited. To get around this, merchants would take on "sleeping partners"--rich men who put up money, stayed out of the way, and shared in the profits.

In 1553, a group of 40 English merchants formed a variation on the trading partnership. They called their club "The mysterie and companie of Merchants adventurers for the discoverie of regions, dominians, islands, and places unknown" (later simplified to "The Russia Company.")

Each member paid 25 English pounds for his membership. With their "joint stock" in hand, they sent three ships off to look for India. They were hoping to find the Northeast Passage--a sea-route to the Far East over the top of Europe. Two of the ships perished. The third landed somewhere and the crew trekked overland to Moscow. There the captain hit it off with Ivan the Terrible. It wasn't India, but it was good enough to earn the Russia Company a tidy profit.

Non-members soon wanted to buy into this "joint stock" company. Their subscriptions were, in fact, prototype stocks. Note, however, that those shares had a tangible value: each one entitled its owner to a proportional cut of any profits.

The joint-stock idea spread. By 1695, there were at least 140 of these companies including globe-girdling behemoths like the English East India Company which swallowed Asian kingdoms for breakfast.

Low Wretches Found Stock Market
With thousands of stock certificates floating around, a trade in stocks inevitably developed. But the actual worth of such stocks was up in the air until the ships came back (or didn't!) Their trading value in the meantime was set by speculation. Starting to sound familiar?

The traders, called "jobbers," worked in coffeehouses and were not an honored breed. Samuel Johnson's dictionary defined a stock-jobber as "a low wretch who makes money by buying and selling shares in the funds." Daniel Defoe wrote an essay titled, "The Villainy of Stock Jobbers Detected."

According to Morgan and Thomas, rich men often employed jobbers to go into coffeehouses and "look sour, shake their heads, and suggest bad news from India." Then a second set of jobbers worked their way through the coffeehouse, quietly buying all the discounted stock they could get. With a history like that, it's not too hard to see how stocks became commodities whose value was set by rumors and innuendo.

Thundering Herds Take to Stocks
Stocks were selling in America by the 18th century. Bank stocks led the way, followed by insurance, and then railroad stocks. These and other stocks were traded briskly in the parks and coffee houses of New York, and this was the origin of the New York Stock Exchange. (Other exchanges, such as the American Stock Exchange and the NASDAQ exchange, came later.)

Railroads seemed so powerful and permanent that even average folks felt safe buying their stocks. So wildly did the masses take to the stock market that in 1928 John D. Rockefeller (or Bernard Baruch or Joseph Kennedy--the story varies) got a stock tip from his shoeshine boy. He immediately went out and sold all his stocks on the theory that when amateurs get into the market, it was time for the professionals to get out.

In the 1930s the masses moved out of stocks with keen regrets. But in the 1940s, Charles Merrill (of Merrill Lynch) decided to "bring Wall Street to Main Street." He put his salesmen on salary and changed their titles to "account executives." Robert Sharp, author of The Lore and Legends of Wall Street, says that by 1950 there were around 11,400 stock brokers working in America. In the 1960s, the term "Thundering Herd" was coined to describe the masses of middle class investors stampeding into the market. By 1988 Sharp counted the number of stock brokers at 100,000. Today millions of Americans own stocks.

How did we come to believe that stocks had value? Are you familiar with the term "herd mentality?"

2 Rules to Becoming a Stock-Market Millionaire
How can you make money off these rivers of paper and speculation? Don't ask me. Ask a rich guy like Warren Buffett, the world's greatest investor: you'll be glad to know he's boiled his secrets down to two simple rules, which are:

Rule # 1: Never lose money.

Rule # 2: Never forget rule number 1.

Hmm. Not as helpful as you'd hoped? Hey, go to the library or better yet, hit the 'net: you'll find plenty of advice about how to profit from the stock market.

If you don't have time for that kind of research, not to worry. Will Rogers has summarized all the best advice in three sentences which I present to you herewith, free of charge: "Don't gamble," said Rogers. "Take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it."