It interests me time and again how little the investment community knows about making incredible ROI on diamond investments. The issue is simple but surprising – there is a serious misunderstanding by the investment community regarding diamonds’ valuation and liquidity. This makes diamonds an extremely attractive and undertapped asset. The investment community can make significant profits by entering the diamond industry, especially in comparison to other exotic private equity, such as container boats and private business acquisition.
A man assessing a diamond Image Credit: The Boston Globe
What is the difference between a private equity (PE) of investing and trading in diamonds, to a PE investing in container ships for transportation? Can container ships be more easily sold once the PE closes down, or would diamonds be more liquid? This question is meant rhetorically but in case you’re really not sure of the answer – diamonds are one of the most liquid hard assets in existence and have been treated as such for centuries, from the days of kings and noblemen up until today. (true that container boat PE generates continuous cash flow from generating, sales, but so can diamonds by being traded…not just held).
Painting of Marie Antoinette bedecked in jewels by by Jacques-Fabien Gautier D’Agoty Image credit: Huffington Post
Is the evaluation of a diamond more complicated than that of a private company? You may be wondering this because of the wrong perception of diamond liquidity. You may wonder: OK, diamonds are liquid, but are they difficult to evaluate and subsequently trade securely? Whether we look at evaluating diamonds or evaluating private companies, you can bring 2-3 experts with different views of the asset and the evaluations will be different. This is a fact in the finance world as well. We can debate it all day long, but in short there is no 1 way of evaluating assets, it is all a perception of the evaluator.
Let’s take IBM and Microsoft as examples. Both companies are public companies. Both publish quarterly financial statements and give out news to the public at the same time. These companies will have third party, analysts covering them. Can we safely assume that all analysts have access to the same information about the company, from financial statements to sales to profits to company vision? (The answer is – of course yes.) Yet each analyst will give a different evaluation.
Why is that? It all depends on the approach. One analyst is more optimistic, while the other conservative. Once looks at short term cash flow, while another looks at future potential. Due to these very different factors each will give a different valuation.
Diamonds are no different in this sense. Bring many specialists of diamonds, a second, third or even fourth generation diamantaire, and they will evaluate the same diamond differently. So why is it that the investment community does not invest in diamonds? The answer is simple. Misunderstandings! No control! They must rely on experts from the industry to properly evaluate, rather than doing the evaluation themselves, because they don’t know how.
The Hope diamond, which has been given numerous different evaluations
Now let’s look at an investment fund that invests in energy. No ordinary CFA, even if they scored a perfect 100% in all their exams, can manage an energy fund. Why? Because energy is a specialized asset, and for that you need somebody who understands energy; how it is produced, transported, traded, sold, among other various elements.
It is the same thing in the case of diamonds.
A diamond expert will be able to better manage a diamond fund than a CFA. Why? Because a diamond expert understands diamonds. Unlike a CFA, a diamond expert understand how to buy, sell and trade, knows where to sell, when to sell and to whom to sell. Only a diamond expert knows valuation and can maximize returns. In short – a diamond specialist understands the asset the best and therefore can best manage the fund.
Many diamond funds have failed as investments (I have written about it). Why is that? Because all of those failed attempts were made by the financial industry without diamond industry cooperation, and they thought that if they buy the most expensive diamonds then they can make money selling them. The crucial information that they were missing was at what price to buy, at what price to sell, and how to go about selling!
Got a question about investing in diamonds that no one is able to answer? Please ask in the comments!