In one sentence — If every trade truly multiplied capital by the same 10%, reinvesting more often would make the result grow exponentially. The formula is correct; the assumption of an always-winning sequence is not a forecast.
The formula, without mystery
With starting capital C₀, return per trade r, and n complete reinvestments, theoretical capital is Cₙ = C₀(1+r)ⁿ. Each trade's profit therefore becomes part of the base for the next one.
Starting from $10,000 and assuming +10% every time, twelve reinvestments produce $31,384; twenty-four produce $98,497; fifty-two produce about $1,420,429. The increase comes from the exponent n, not from any special market magic.
The figures printed in 1970
Hurst reports $31,380 for twelve trades and $1.41 million for fifty-two; these are roundings consistent with the formula. For twenty-four trades, however, he prints $109,150, while 10,000 × 1.10²⁴ gives $98,497. The discrepancy should be preserved as an arithmetic error in the source, not silently corrected.
Percentages can also confuse: $31,384 is 313.84% of starting capital, while the net gain is $21,384, or +213.84%. Ending capital and return are not the same measure.
The assumption hidden in the exponent
The sequence assumes that every trade earns +10%, capital is immediately and fully reinvested, and there are no losses, spread, commissions, slippage, taxes, or size constraints. It does not estimate the probability of obtaining those fifty-two consecutive outcomes.
Compounding amplifies every multiplier, including a negative one. A 10% loss takes 100 to 90; returning to 100 then requires +11.11%. More trades help only if the net and repeatable return remains positive after errors and costs.
What the interval really says
The book links shorter intervals to more reinvestment opportunities. Appendix III pushes this relationship using hindsight turning points across 300 stocks. It measures potential under perfect timing, not the return an operator could have earned without knowing the future.
Shortening the interval can increase turnover, noise, and execution dependence. “Trade more often” therefore does not follow automatically from the formula.
Using it in a serious test
First measure net return per trade under fixed rules; then observe how many realistic opportunities exist. A useful report separates average return, loss distribution, trade count, time without a position, costs, drawdown, and the out-of-sample period.
Compounding ultimately describes how an already-defined sequence accumulates. It does not create the quality of that sequence.
Sources
- J. M. Hurst, The Profit Magic of Stock Transaction Timing, Prentice-Hall, 1970, Chapter 1, pp. 23–26 — numerical examples and the interval thesis.
- J. M. Hurst, The Profit Magic of Stock Transaction Timing, Appendix III, pp. 204–206 — 300-stock sample and theoretical interval-return relation.
- Investor.gov, Compound Interest Calculator — independent reference for the formula and compounding frequency.
- FINRA, Brokerage Accounts — margin, interest charges, and liquidation risk.
Connections
Hurst's operating philosophy · Appendix III — transaction interval · Four pillars · 1968 trading experiment