Diamonds

Diamonds are crystalline forms of pure carbon, prized for their brilliance and hardness, making them a popular choice for jewelry and industrial applications. As an investment, they are considered a 'hard asset'—a tangible item with physical substance. Unlike financial assets like stocks or bonds, you can hold a diamond in your hand. Historically, they have been promoted as a portable 'store of value', a way to protect wealth against 'inflation' or economic turmoil. However, for a value investor, this sparkling allure is often deceptive. The diamond market is notoriously opaque, lacking the standardized pricing and liquidity of other commodities like gold. Each gem is unique, valued on a subjective set of criteria, and the massive retail markup means you often lose a significant portion of your investment the moment you buy it. The simple truth is that a diamond's value is driven more by marketing and emotion than by sound economic principles.

The idea of investing in diamonds is seductive. They are durable, portable, and beautiful. But when viewed through the cold, hard lens of 'value investing', the glitter quickly fades.

The arguments for holding diamonds as part of a portfolio are usually rooted in their physical nature and historical perception.

The primary appeal is their perceived ability to hold value over long periods. Proponents argue that, like gold, diamonds can act as a hedge against currency devaluation and economic crises. Because they pack a lot of value into a small size, they are seen as a discreet and portable form of wealth that can be transported easily across borders if necessary.

In a world of digital transactions and complex financial instruments, the idea of owning something real and tangible is comforting. A diamond is an asset you can see and touch, which provides a psychological sense of security that a stock certificate or a number on a screen cannot.

A value investor seeks to buy assets for less than their intrinsic worth. For several key reasons, diamonds simply don't fit this model. As Warren Buffett once noted, if you owned all the gold (or diamonds) in the world, you'd have a giant cube that “doesn't do anything but sit there and look at you.”

This is the single most important argument against diamonds as an investment. A diamond is an unproductive asset. It doesn't generate rent, interest, or 'dividends'. It won't produce anything or create more wealth. Its only hope for a return is that someone else—a “greater fool”—will be willing to pay more for it in the future. Contrast this with a great business, which is a productive asset that generates 'cash flow' for its owners year after year. A value investor would much rather own a piece of a profitable company than a shiny rock.

Unlike gold, which has a universal spot price, there is no standard price for a diamond. Each stone is unique, making the market incredibly inefficient and unfriendly to non-experts. The value is determined by the 'Four Cs':

• Cut: The quality of the diamond's angles and facets, which determines its sparkle.
• Color: The lack of color in a white diamond, graded on a scale from D (colorless) to Z (light yellow).
• Clarity: The absence of internal flaws (inclusions) or external blemishes.
• Carat: The weight of the diamond.

Even with a grading report from a reputable lab like the 'Gemological Institute of America' (GIA), two diamonds with identical specs on paper can have vastly different prices based on subtle visual differences. This lack of 'fungibility'—the inability to substitute one diamond for another—makes it nearly impossible for an amateur to know if they are paying a fair price.

The modern perception of diamonds as a precious, rare, and essential symbol of love is not a natural phenomenon; it's one of the most successful marketing triumphs in history. For most of the 20th century, the 'De Beers' company operated a powerful 'cartel' that controlled the global diamond supply. By carefully restricting the number of diamonds released to the market, they created an illusion of scarcity and kept prices artificially high. Their “A Diamond Is Forever” campaign, launched in 1947, masterfully linked diamonds with eternal love and marriage, creating a powerful emotional demand that persists to this day. This history reveals that diamond prices are heavily influenced by market manipulation and sentiment, not just supply and demand.

Perhaps the most painful lesson for a would-be diamond investor is the staggering gap between the retail purchase price and the resale (wholesale) price. Retail jewelers have high overheads, leading to markups that can be 100% or more. The moment you buy a diamond and walk out of the store, its resale value plummets. Selling a diamond is also notoriously difficult. You won't get anywhere near the retail price from a pawnshop or dealer. This makes diamonds a highly 'illiquid' asset—one that cannot be easily and quickly converted to cash without a substantial loss of value.

If you are still captivated by diamonds, a more sensible approach is to invest in the businesses that mine, process, or sell them, rather than owning the physical stones. By purchasing shares in a publicly traded company (like a major mining corporation or a retail chain such as 'Signet Jewelers'), you are buying a piece of a productive enterprise. You can analyze its balance sheet, income statement, and competitive advantages to determine its intrinsic value—the true spirit of value investing.

While diamonds are a beautiful luxury good and a powerful symbol, they make for a poor investment for the average person. They produce no income, their pricing is opaque, they are difficult to sell for a profit, and their perceived value has been heavily shaped by decades of clever marketing. A wise investor should treat diamonds like they would a luxury car or a fine watch: as a purchase to be enjoyed, but not as a cornerstone of a wealth-building strategy. For that, stick to productive assets that work for you.