Diamonds – One Bad Investment
By
I was speaking recently with a friend of mine who is still active in the diamond business about a deal he made in the past year that went sour. Here’s the story:
At the hight of the large expensive diamond craze (this market parallels the trade-up real estate market quite well), they had a customer who wanted some very expensive diamond. I think it was a pair of 5 carat high clarity high color stones with perfect makes. My friend didn’t have the diamonds in his inventory, but he found a colleague in the business with the stones. He found out what this dealer wanted for the diamonds, and added a small markup and offered them to his customer. The dealer at the time wanted something around 3% over the rapaport list price. The transaction was made and after a few days the customer decides they don’t want the diamonds.
The only problem is the dealer from whom my friend sourced the diamonds decides he doesn’t want them back. He refuses to take the return. So my friend is no saddled with this pair of extremely expensive stones (the total was over $300,000 I believe) that he bought at a high price (which he only justified because he was flipping the stones). Unfortunately, the market crashed shortly thereafter.
A few weeks ago he was telling me how he’s still stuck with those two stones. He told me that he was trying to sell them for -35% below rapaport list price, and he couldn’t find a buyer. I was shocked when he told me that he would probably sell them for -40% or even less if he had an offer from a reliable firm who’s payment would be just short of an absolute guarantee.
Just to make it clear, selling at -40% from a cost of +3% is a loss of almost -42%. If we call the Rap price X and the total weight Y, then the cost of the diamonds is X*1.03*Y. The revenue generated from a sale at -40% would be X*0.60*Y. The X and Y cancel each other out, and you’re left with 0.60/1.03 – 1 to arrive at the profit percentage.
One of the intended messages of the “diamonds are forever” motto is that a diamond’s value is eternal — that it is an investment forever. This story is just one example that shows just how brutally false that idea can be.
