Reporting: weighted average price source

[Charles Day]

On Mon, Jul 7, 2008 at 8:53 AM, Derek Atkins <warlord at mit.edu> wrote:

> "David G. Hamblen" <dhamblen at roadrunner.com> writes:
>
> > A few years back (v1.8x), I had problems with these absolute values, and
> I
> > patched report-utilities.scm,and commodity-utilites.scm so that the
> balance
> > sheet would balance.  In addition to completely removing all the
> numeric:abs,
> > I also had to do something about the division by zero in
> commodity-utilities
> > when there was a zero share balance.  I'm using the "Nearest in Time"
>  and the
> > problem went away in the 2.x updates.  If anyone's interested, I can dig
> up
> > my old postings.
> >
> > Anyway, I vote for getting rid of absolute values in bookkeeping.
>
> It's not a question of book keeping.  It's a question of computing
> the share price.  GnuCash stores buys as a positive and sells as
> a negative.  As Christian pointed out before, if you buy x shares
> for $y and then later SELL x shares for $y then a non-abs weighted
> average gives you a price of 0/share!  Obviously this is wrong.
> The weighted average should be $(y/x) per share.   But without
> the ABS you get:
>
>   y * x + (-y)*x        xy -xy       0
>   --------------  ==    ------  ==  --- = 0
>      x + x                2x         2x
>
> When you use abs() here you get the right answer.
>
> Of course, then you need to make sure you re-apply the negative
> for sales.
>
> So it's not a question of absolute values in bookkeeping.  It's
> a question of absolute values in computing share prices.  Not
> the same thing.
>

I agree with Derek. That is, the "weighted average" price source is not
intended to compute the cost of your holdings, but rather to compute the
volume-weighted average price of all buys AND sells. So it needs to keep
using the absolute value. However, it does need to be changed: it should
ignore exchanges with a zero "amount" in the split.

So I think we need to add a new price source of "Cost" which computes
without absolute value and does include zero "amount" splits. That's where
taking a look at David's code might come in handy (though implementing this
seems like a pretty simple job: copy existing weighted average function, get
rid of absolute value, add report option).

Whether to even keep the "weighted average" price source is a question worth
asking; I don't think it is a useful way to revalue current holdings.
Historical volumes don't seem relevant. Even if the volume weighting was
removed, the formula also weights quotes that are clustered within a small
period of time more heavily than quotes that are spread apart. In other
words, if I have 30 quotes from this month and one quote from last year, the
recent quotes practically drown out the quote from last year. If we want to
aim for a historical price average then using something like linear
regression seems like a better way to go. Could even add some time factors,
like getting the midpoint of the portion of the line covering the last 30,
60, 90 days, whatever. But now I am brainstorming new price sources.

I do think a volume-weighted average price can be useful; it's just more
appropriate for measuring your personal trading performance. Maybe there
should be a performance report designed around that.

-Charles

derek
> --
>       Derek Atkins, SB '93 MIT EE, SM '95 MIT Media Laboratory
>       Member, MIT Student Information Processing Board  (SIPB)
>       URL: http://web.mit.edu/warlord/    PP-ASEL-IA     N1NWH
>       warlord at MIT.EDU                        PGP key available
>