How Does the Average Investor Invest Rationally in an Irrational World?
My own children’s experiences and all that’s happened with Bitcoin and GameStop recently got me thinking: Investors need to keep their greed in check and make sure they’re investing, not gambling.
- (opens in new tab)
- (opens in new tab)
- (opens in new tab)
- Newsletter sign up Newsletter

A few weeks ago, I received two text messages from each of my children (ages 24 and 20) 15 minutes apart. One asked for my opinion on the stock market. The other asked what he was supposed to do with a tax document he received from Robinhood, the trading app. It was a red flag to me, and we had an important discussion about what IS going on in the markets.
Unless you’ve been asleep the past month or so, you’ve likely wondered what is to make of investments like GameStop or Bitcoin. These investments have been extremely volatile, and it’s hard to understand how that volatility can be reconciled with reality. In short, I would suggest that oftentimes, it can’t.
The Rise and Fall of GameStop
The GameStop story was compelling: The price of the stock was driven up swiftly and dramatically by a horde of small investors communicating on social media. The run-up of the price led large professional investors (i.e., hedge funds — the so-called “smart money”) to bet the value of the stock was overpriced, and it would soon fall. This is called “shorting” in Wall Street parlance, and a classic David vs. Goliath standoff that took place over a few weeks. For a period of time, the small investors clearly won, and they drove some of the hedge funds to exit their positions and accept a loss … a defeat.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Many hailed it as the small investors winning, and while many no doubt profited handsomely, I suspect an equal number incurred economic pain with the inevitable return to earth. According to WSJ Markets data (opens in new tab), on Jan. 11, 2021, GameStop was priced at $19.94/share. On Jan. 27, it topped out at $347.51/share, but on Feb. 4, it was down to $53.50. That is an irrational swing all investors should take special care in scrutinizing, and it’s prudent to avoid allocating anything more than a sliver of a portfolio to it. If you choose to go down an investing path like GameStop, invest only what you can afford to lose.
And What Explains Bitcoin’s Allure?
Bitcoin’s ascent has been more of a slow-moving one, but similarly stunning and volatile. In April 2011, one Bitcoin was valued at $1. As of mid-April, it was priced at more than $60,000/Bitcoin, but the fluctuations each day are considerable (opens in new tab). Cryptocurrency may be gaining traction in the elusive pursuit of respectability and, more importantly, usability.
I have always been mystified by the attraction of Bitcoin. If I own a Bitcoin, how do I use it to make a purchase? And if I did have a debit card accessing Bitcoin, would I even use it with the wild swings in its value? Tesla has said they may begin to accept Bitcoin for purchases, and BNY-Mellon, the oldest bank in the country, has said they are looking into acting as custodian for Bitcoin for some investors. Those are two material developments that may add to the “respectability” question. Still, my advice to the average investor would be the same: Tread carefully here as well, and only invest what you can afford to lose.
How I Learned as a Child Never to Gamble
When I was in the fifth grade, our church had a summer festival to raise money. They had games and food and beer. Surprisingly to me, they welcomed me to a game-of-chance table. (The beer tent? Not as lucky.) I had allowance and savings from shoveling snow, so I thought, why not? In fairly short order, I lost what was in my pocket. Undaunted, I ran home to empty the piggy bank. As I flew out the door, my mother asked what I was up to. I sheepishly explained what was going on, anxiously fearing her response. After a verrrry long pause, she unemotionally said “good luck.” I asked myself: did she really mean it? Or was she really upset with this entrance into the adult world of chance and vice?
Well, you can guess how it played out. The piggy bank was lost in the span of a few hours. She never asked – she knew by my demeanor. To this day, gambling just raises my blood pressure. A life lesson was learned, and delivered by a wise mother.
Don’t get me wrong. We don’t need to and should not approach investing as if it’s gambling. Over the long run, we can have a high level of confidence we will achieve reasonable returns with commensurate risk. However, there have always been times where a significant blurring takes place between investing and gambling. The aforementioned are modern day examples. Go out and Google “Dutch Tulip Bubble” or the “Great British Bicycle Bubble.” There will always be greed. Our psychological and emotional challenge is how to recognize and temper it.
As for my children, it was a reminder to me that most kids are ill prepared for investing and financial management coming out of school. It’s a process, not an event, and it is incumbent upon all of us to educate them on what can be a complicated world out there.
Be well, and happy investing!
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
Jamie Letcher is a Financial Adviser with LPL Financial, located at Summit Credit Union (opens in new tab) in Madison, Wis. Summit Credit Union is a $5 billion CU serving 176,000 members. Letcher helps members work toward achieving their financial goals and through a process that begins with a “get-to-know-you” meeting and ends with a collaborative plan, complete with action steps. He is a member of FINRA/SIPC, a registered broker-dealer and investment adviser.
-
-
The Most Popular Car Insurance Companies 2023
These are the most popular car insurance companies on the market
By Erin Bendig • Published
-
The Best Places to Retire in the World
When it comes to the best places to retire, which country is at the top of the list? And where does the U.S. feature on the leaderboard? We investigate.
By Elaine Silvestrini • Published
-
Long-Term Care Planning vs. Taxes: Finding a Healthy Balance
Many families discover that trying to mitigate the cost of long-term care can conflict with another common retirement concern — reducing taxes for retirees and their heirs.
By John M. Graves, Esq., IAR, Agent • Published
-
For a Concentrated Stock Position, Ask Your Adviser This
There can be advantages to having a lot of stock in one company, but ‘de-risking’ can help avoid some significant disadvantages.
By Robert Gorman • Published
-
Trusting Fintech: Four Critical Moves to Protect Yourself
A few relatively easy steps can help you safeguard your money when using bank and budgeting apps and other financial technology.
By Shane W. Cummings, CFP®, AIF® • Published
-
Four Ways Women Can Take Control of Their Financial Health
Adjusting for life events, taking advantage of workplace benefits and preparing for caregiving can make a big difference in your financial future.
By Kate Winget • Published
-
Can a Potential Employee Negotiate Conditions of Criticism?
Labor lawyer weighs in on whether job candidate with traumatizing childhood can request that prospective boss curb his management style to avoid triggering her.
By H. Dennis Beaver, Esq. • Published
-
Long-Term Care Insurance Quandary: Keep Paying or Let It Go?
As long-term care insurance premiums go up, many policyholders are struggling with what to do. Accept higher premiums, reduce benefits, let the policy lapse or take a payout?
By Roxanne Alexander, CFP®, CAIA, AIF®, ADPA® • Published
-
Four Steps to Prepare Your Finances for Divorce
Divorce is rarely easy, but getting financial paperwork in order, working with professionals and making tough decisions now can take some of the stress out of it.
By Marcy Keckler, CFP, CRPC • Published
-
In Retirement, Many Crucial Questions Start With the Word ‘When’
For a secure retirement, make sure you know the answers to all of these “when” questions.
By Bradley Geddes, CFP® • Published