California Special Election

California is holding a Special Election on Tuesday, May 19th, 2009. This election is meant to help resolve a $40 billion budget shortfall in fiscal years 2008-09 and 2009-10. The California legislature and Governor fought long and hard to resolve the $40 billion deficit. This resulted in $15 billion of spending reductions, $12.5 billion of tax increases, and $8 in federal funds from the stimulas package. The final $5 billion is to be met by borrowing from the state lottery (see proposition 1C below). As part of this negotiation, six propositions (1A through 1F) were placed on this Special Election ballot. The claim is that if we don't pass these propositions, we could face billions of dollars of spending cuts and/or tax increases.

So how should you vote (assuming you haven't already sent in your absentee ballot)? First, a summary of my recommendations:

Vote YES on 1A, 1B, and 1F. Vote NO on 1C, 1D, and 1E.

Next, here's a brief description of each proposition and why I have a particular recommendation.

• Proposition 1A: "Rainy day" reserve fund and extension of some tax increases for up to two more years. Vote YES on 1A.
  This proposition changes the budget process by increasing the "rainy day" reserve fund so that above average revenues can be deposited into it for use during economic downturns. This seems like a good idea to me. I believe the Republicans put this in place to control spending in good times---extra revenue gets saved rather than spent on new programs. In exchange, the Democrats were allowed to continue some tax increases (sales tax, vehicle license fee, and income tax) for up to two extra years to increase revenues. Given the difficult budget situation, this seems like a reasonable thing to do. So I believe this is a good compromise that we should support.
  
  
• Proposition 1B: Supplemental payments for education. Vote YES on 1B.
  Proposition 98 requires that a minimum amount of the budget be spent on education, where the "minimum" amount can be determined by various tests and can be temporarily overridden by a 2/3rds vote in each house and the approval of the Governor. When less money is allocated to education than this "minimum", it sets up a future funding obligation to make up the difference. This proposition postpones these future funding obligations in the near term (next 2 years), and instead sets up a supplemental payment of $9.3 billion over future years. But all this can only happen if 1A is passed.
  
  I can't say I completely understand the pros and cons here. It appears to me that 1B allows the state to decrease education funding in the near term and paying it back in future years. But this appears to be allowed by proposition 98. So I'm not sure what this is buying. Given this neutralish feel to it, and that no argument against it was provided in the voter information guide, I'm fine with voting yes.
  
  
• Proposition 1C: Borrowing from the lottery. Vote NO on 1C.
  The idea here is allow the lottery to increase its payout so that more people will want to play the lottery and thus increase revenues. Furthermore, it would borrow $5 billion from the lottery this year by selling a piece of future revenues to private investors. This is a crucial piece in the budget agreement to close the $40 billion deficit.
  
  I really don't like this. Where do you think the increased lottery revenue comes from? Lower income folk, of course. So we're closing the budget deficit by making lower income folk effectively pay an implicit "tax". And the bit about private investors getting a piece of the action also seems like a bad idea to me. The lottery was sold as a way to raise money for education. And now it's going to be used to generate profit for private investors? That seems wrong to me.
  
  
• Proposition 1D: Redirect funds from early childhood development. Vote NO on 1D.
  Back in 1998 proposition 10 established a program to expand early development programs for children up to age five. These programs were funded by tobacco taxes. 1D wants to redirect proposition 10 funds to the state's General Fund, to protect health and human services for children.
  
  I find this redirection of funds to be wrong. Voters originally approved proposition 10 for a specific purpose. They didn't approve extra taxes to be simply diverted into the General Fund. To simply divert those funds seems like an act of bait and switch.
  
  
• Proposition 1E: Redirect funds from mental health. Vote NO on 1E.
  This is similar to 1D, except that the funds are redirected from revenues raised by proposition 63 in 2004. Proposition 63 funds mental health programs with a 1 percent income tax increase for income over $1 million. Once again, the legislature wants to redirect these funds to the General Fund to pay for various mental health programs. Once again, the voters approved the tax increases in proposition 63 for a specific reason, rather than to allow the legislature to use it as they please. Seems wrong to me.
  
  
• Proposition 1F: Prevents pay increases for elected officials during budget deficits. Vote YES on 1F.
  This seems quite reasonable to me.
  

Doing nothing...

I can do nothing in all these ways...

ETF portfolio 2008 returns

2008 was an absolutely terrible year for all sorts of investments: the US stock market as measured by VTI returned -36.68%; developed foreign markets as measured by EFA returned -41.04%; and emerging markets as measured by VWO returned -52.47%. Bonds did much better: US investment grade bonds as measured by AGG returned 7.91%.

So how did you do last year? It's worth taking the effort to track your actual annual returns over time, and to compare those returns with standard indices. That gives you valuable insight into whether or not your investment strategy is any good. Perhaps you manage your own money by investing in individual stocks. Such tracking will then tell you whether your stock picking skills are up to the mark (I hope they are!). Or perhaps you're using a money manager. In that case, such tracking will tell you whether your money manager is worth the fees he or she is charging.

For my part, I've decided that my stock picking skills are not up to the mark, and that I'm not sure how to pick a money manager that's worth the fees. So I've been using a diversified portfolio of index ETFs (the actual portfolios are here). The only decision to be made in this strategy is how much risk you want to take on.

So how did these portfolios perform in 2008? Quite poorly, as one might expect. But the diversification between stocks and bonds did help---the more conservative portfolios lost less than the more aggressive ones. Here's a table summarizing the returns over the last 3 years:

	Conservative	Moderately conservative	Moderately aggressive	Aggressive
2008	-15.5%	-24.8%	-32.0%	-39.1%
2007	3.2%	5.2%	7.8%	10.6%
2006	13.3%	15.1%	16.8%	18.6%

You can see more details on the returns in the various years here (including how the various components performed): 2008, 2007, 2006.

One final point about these portfolios and last year's terrible investment climate---there was lots of opportunity to do tax loss harvesting! The essential idea is to sell an ETF that is showing a significant loss (and there were plenty of such opportunities last year) and then buy it back after 30 days (to avoid a wash sale). In the interim, to make sure you continue to have the equivalent market exposure, you buy an alternate ETF that tracks a similar, but not the same, index (using an ETF that tracks the same index may fall foul of wash sale rules). When you do your taxes, the capital loss you incur with this sale can be used to offset other capital gains and up to $3,000 per year of ordinary income. The capital loss can be carried over to future years. I did some tax loss harvesting last year, so I think I'm set on capital gains for some time to come...:-)

Science Fair Projects

It's Science Fair time again at our girls' school. Last weekend the girls did their projects with a little help from me. Here's what they did. Both projects are from the sciencebuddies.org website.

Archimedes screw pump

I suggested about a dozen different projects to our third grader before we found the one she wanted to do---she wanted to build an Archimedes screw pump. Archimedes originally designed this pump to remove water from a leaking ship. The design is still used in many modern day pumps. The version we built involved wrapping a vinyl tube in the form of a helix around a PVC pipe. As you rotate the PVC pipe, the lower end of the vinyl tube scoops up water. As the pipe continues to rotate, the water moves up toward the upper end by moving down inside the helical tube. It's quite a remarkable invention by Archimedes. Here's a video of our version in action:





Extracting strawberry DNA

Our fifth grader wanted to do a project with DNA. We found a simple project to extract strawberry DNA. You start by smashing some strawberries to pulp and adding a concentrated detergent solution. The detergent pops open the strawberry cells (the technical term for this is lyse), releasing strawberry DNA into the solution. You then separate the solution from the strawberry pulp using cheesecloth, and pour the solution into a test tube (instead of a test tube we used an inexpensive rain gauge that we found at the local hardware store). Finally, you pour chilled rubbing alcohol into the test tube. The alcohol forms a layer above the strawberry solution, and remarkably the DNA precipitates out into the alcohol! Here's a picture of the DNA we extracted:


The white stringy stuff is the DNA that has precipitated into the alcohol. (We didn't have any way to verify that this was indeed DNA---we're just assuming that it must be DNA!)

Prince of Ayodhya

Its been a while since my last post, but there's an easy explanation for this hiatus---I found a most incredible series of books to read! And that's been taking up all my spare time, leaving no time to blog.

So what's this series? The surprising answer is that it's the Ramayana! (For those not familiar with the Ramayana, it is one of the two great epics of Hindu mythology, the other great epic being the Mahabharat.) The answer is surprising because, of course, anyone growing up in India has learnt the Ramayana from innumerable sources---from aunts and grandmas, from the celebration of Diwali, from Ram Leelas (popular enactments of the Ramayana), from Amar Chitra Katha, and perhaps even from the Ramayana TV series. So what could possibly be so exciting about this series of books? And what is this series any way?

The series is a collection of 6 books written by Ashok Banker. The first in the series is Prince of Ayodhya. Mala had heard high praise for this series from her niece, and so she brought back a copy of Prince of Ayodhya when she returned from her recent trip to India. I read the first few pages of the book on the very first day she was back, and was instantly hooked! It is like no Ramayana you've encountered before. It is written like a fast paced thriller. Each chapter ends on a cliff-hanger or a mini-climax, making it near impossible to stop reading---you have to start the next chapter to see what's going to happen next. Like all great epics, it is a grand story of good and evil with powerful, heroic, courageous, despicable, and beautiful characters.

And it is told with loving detail. Most tellings of the Ramayana I've encountered focus mainly on describing a series of events. Of course, the main events are the same here. But Banker adds so much more: he develops the characters beautifully (e.g., I hadn't appreciated how evil Ravana really was!), the inter-personal relationships are fascinating, the social and cultural backdrop is described beautifully, and the introduction of various minor characters enhances the richness of the tale. And, above all, it is exciting! If you're a fan of Tolkien's Lord of the Rings, you'll love Banker's Ramayana!

Finally, I have to note that the preface of the book is worth reading. It tells the history of the Ramayana from Valmiki's original, to Ved Vyasa's account as part of the Mahabharat, to Kamban's Tamil retelling, to Sant Tulsidas's Ramcharitramanas, to more recent accounts by Rajagopalachari. The fascinating thing here is that all these accounts purport to tell the same tale and yet they differ even on very basic events. For example, Banker notes:

One instance is the 'seema rekha' believed to have been drawn by Lakshman before leaving Sita in the hut. No mention of this incident exists in the Valmiki Ramayana.

This shocked me---in my mind the 'seema rekha' is a very central plot element in the Ramayana! The point is that for such ancient epics there's no sense in which there's an "official" version. Which means that all you can do is to enjoy each retelling on its own merits. If you take this attitude, rather than constantly wondering if a particular plot element was "really" part of the Ramayana, you'll thoroughly enjoy Banker's version!