Definition of sheep


What are sheep?

A sheep is a pejorative term for an investor who lacks discipline and whose business strategy is unfocused and based on the suggestions of others, such as friends, family, and so-called financial gurus.

Instead of following its own investigation and due diligence, a sheep mindlessly follows the herd, chasing trends and doing misinformed business.

Key takeaways

  • Sheep is a derogatory term for traders who simply follow the crowd without making their own decisions or evaluations.
  • The behavior of sheep can be contrasted with other “animals” on Wall Street, such as bulls and bears, each of which has a definite view of the market they have.
  • Sheep can be a profitable target for certain investment advisers or “gurus” as they tend to be more susceptible to sales pitches and accept advice without question.

Understanding sheep

Sheep may lack knowledge of investment principles and tactics, or they may not invest the time to do the proper research to educate themselves on how to manage their investments. This leads them to lose confidence in their own ability to make investment decisions, so they feel the need to depend on the guidance or advice of others. Unfortunately, they often end up putting their financial future in the hands of people who may or may not be reliable sources of good investment advice.

This type of investor often makes rash investments without first determining whether these decisions are financially viable. The behavior of sheep contrasts with that of bulls and bears, who have focused views on the market, which do not always end up being profitable, but are, at least, the result of their own analysis.

Sheep, bulls and bears

Like the animal that inspires the term, an investor who acts like a sheep is a follower, depending on someone else (the shepherd) for guidance. These pastors can come in the form of financial experts, the latest trend, or the history of the market. Well-meaning friends and family, though perhaps not as knowledgeable, can also play the role of shepherd for sheep investors.

Sheep-looking investors are often the last to participate in a major market move, such as the tech boom of the late 1990s that culminated in the tech bubble, because they base their investments on what is most talked about. Research, with the benefit of hindsight, has shown that sheep-like investors are the most likely to suffer investment losses because they tend to lack a clear investment strategy.

Sheep characteristics and risk potential

Sheep investors are particularly vulnerable to making poor decisions and costly mistakes in a strong bull market atmosphere, as this is when many investors feel optimistic and confident. Some may even become overconfident, especially if they are caught up in the emotion of the positive impulse, and this can make the sheep more prone to risky moves.

To make matters worse, investment-related products and services can seize this opportunity, intensifying their “hard sell” efforts to promote investment materials, tools, and services. This, in turn, can cause the sheep to rush and possibly lose even more money in addition to the amount they had already invested in stocks and shares.

For those “gurus” looking to sell financial advice and products, sheep are particularly profitable targets because they tend to be more susceptible to convincing-sounding sales pitches and persuasive tactics.

www.investopedia.com

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Mark Holland

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