Is there any advantage or strategy in buying/investing shares of many companies spread-out vs. fewer/more selective ones all-in?

Question

For those seeking high risk and trying to capitalize on rising stock prices -- specifically the potential for sky-rocketing prices (like shares ten-fold or higher within 1 year) -- would one have better odds investing in different stock vs. continually buying shares of select ones they predict? For example:

John buys 200 shares of CADI at $2 for a total of $400, and he expects the price to double in the next few months so that he can get $800. Nobody can know for certain that this will happen, so would John have better odds investing in 1 share of CADI, BOKI, EDMA, ERSO, CEOL, etc., up to 200 for the same portfolio anyways? Since nobody can guarantee that any stock price will sky-rocket in a short period of time or not, what would be advantageous/disadvantageous in pouring $400 in one stock expecting it to go sky-high vs. spreading the same value of many more?

I don't know how difficult this question is to answer or if it's even answerable, but basically:

Is there an advantage in being picky in select stocks when hoping for rising value? Couldn't any stock sky-rocket and nobody can know ahead of time which? Would spreading out be the same?

I of course mean "the same" in terms of odds in becoming wealthy or the like -- not "the same" as in some intrinsic determinator of stock value quantification per se across hypothetical stocks alike.

I just want to know if there's any viable strategy or mathematical sense here. Obviously a high investment in one can yield many more times the value multiplied SHOULD it does rise -- however, it may not and could turn out poorer than, say, spreading across 200 different stocks at $1 a piece where one in two-hundred chances of one of those doing the same thing could yield the same result at a lower or similar multiplication scale (assuming one invests less or roughly the same throughout and regularly keeps buying 'X' shares of each list of stocks they hope will rise vs. just going all in for one or fewer). I know this is confusing, but what're advantages/strategies/etc.?

Answer 1

The benefit is diversification. There is absolutely a mathematical principle behind the theory - which is the fact that the "risk" (variance of expected changes in value, or volatility) is lower for a diverse portfolio of assets. The downside is that the chance of hitting a windfall are significantly lower, but so are the chances of catastrophic losses.

The concept is akin to playing blackjack. The goal is not to win every single hand - the goal is to win more hands than you lose. Buying an individual stock without specific knowledge that would guarantee a huge payout is speculation. If you buy dozens or hundreds of similar stocks, then you only need to have more gains that losses to come out ahead. If one stock skyrockets but the rest have slight falls, you still might come out ahead, versus having long odds of a big payout.

Answer 2

In general the more different stocks you buy, the safer. The chance that one company will go down the tubes tomorrow -- because their brilliant CEO had a heart attack, their major factory burned down, whatever -- is much higher than the chance that 100 companies will all go down the tubes tomorrow. But on the other hand, buying stock in more companies also "protects" you against sudden gains. The chance that one company will skyrocket tomorrow -- because they introduced a wildly successful new product, implemented a vastly improved production system, etc -- is much higher than the chance that 100 companies will all skyrocket at the same time.

That's why people who want a very conservative investment strategy typically buy into broad-based mutual funds. The fund probably invests in hundreds or even thousands of stocks, so if any one has a disaster, its impact on the total is tiny.

Bear in mind that millions of people are investing in the stock market. If there's good reason to believe that XYZ company will do well, it's likely that lots of people know it, and so they will bid up the value of XYZ. So to beat the averages, you have to have knowledge that most investors don't. You might know something specific about XYZ -- you know that they're about to come out with a new product or some such. (Though if this knowledge is not available to the general public, if you know this because you play tennis with their marketing director or some such, this could be "insider trading" and using this knowledge could get you in trouble.) You might know, or think you know, something about long-term economic trends. Like you carefully study global economics and conclude, based on growing consumption of flavored coffee in Botswana and increased sun spot activity and 600 other factors -- that world demand for iridium will increase. So you buy stock in companies that mine iridium. If you know this and most other people don't, you can beat the market averages. Of course if your analysis is wrong, you could lose money. That's how the system works.