Diamonds

I recently read an article about Drew Brees, star quarterback of the New Orleans Saints. He got some bad investment advice and lost a cool $9 million as a result. Let’s break down this horrible play call.

Drew Brees was pitched an investment in $15M worth of “investment grade” diamonds by jeweler Vahid Moradi and his company CJ Charles Jewelers beginning in 2014. According to Brees this investment was his attempt to “diversify his investment portfolio”. Now I have done a lot of reading and a lot of research into the world of investing. I’ve read all the classics and studied all the masters. I’ve even read a lot of stuff that ventures pretty far off the beaten path. Never once I have read anyone suggesting diamonds as an asset class used to diversify one’s investment portfolio. Never. Furthermore, the term “investment grade” anything spells scam right off the bat in my book. Tread carefully if you hear that phrase.

a pile of diamonds

Diamonds as an investment? I’ve heard of criminals buying diamonds so they can shove them up their butts as they sneak across the border into Switzerland in an effort to get out of Dodge, but I don’t think that’s what Brees had in mind here…

Markup?

So Brees’ jeweler ended up fumbling on this sale. Brees has now learned these “investment grade” diamonds we NOT worth $15M but only worth $6M. It turns out his jeweler has confessed to marking the diamonds up to (get this) a price he expected the jewelry could be resold in 10 to 15 years. Time out here… Let’s check the replay. Imagine buying a stock from a stock broker and not paying today’s price, but paying the price the broker expects the stock can be resold 10 to 15 years down the road. What is this diamond guy smoking? That would equate to a 0% gain after 10-15 years and I thought we were talking “investment grade” diamonds here… What a scam, though it is worth noting Brees is a spokesman for Advocare. Hey… I’m just sayin’. Stand tall in the pocket here…

The Diamond Market

Simply put diamonds are not an investment as there is no liquid, fungible market. Furthermore, most folks don’t realize that diamonds are purely a marketing invention and are not even that rare. Careful supply restrictions by large monopolies like De Beers is what keeps the price of diamonds artificially inflated, along with massive advertising campaigns. Furthermore, markup on the retail side of a diamond can easily exceed 200% of their wholesale value.

diamond ring
I mean it’s pretty and all, but…

Try buying a diamond ring for $10,000 and going back a year later and selling it back to your jeweler. He’ll probably be embarrassed at the wholesale/buyback price he’d have to offer you. It would make the prices he has on his retail shelves look like a scam.

Ad Blitz…

You can’t listen to the radio for more than 15 minutes without hearing an ad from a diamond merchant. You can’t watch TV for more than 30 minutes without seeing starry-eyed lovers buying white diamonds, chocolate diamonds, canary diamonds, and other diamond marketing oddities. And why are these ads sandwiched in between the 4-hour erection ads? Somehow, advertisers have made diamonds a symbol of manhood, economic success, and love. As a result, over 80% of marriages begin with a diamond engagement ring. We’ve been duped, fellas…

Diversify?

In my opinion you really only need 4 asset classes in your portfolio: stocks, bonds, real estate, and cash. Now, within those 4 main asset classes you can get as broad or as fancy as you like, but with those 4 asset classes you can cover everything you need. You can get into micro cap stocks or emerging market bonds if you like, but keep the speculation within reasonable limits of your portfolio (no more than 10%) and stick with broadly diversified holdings within the 4 major asset classes.

The Diavik Diamond Mine, Canada
The Diavik Diamond Mine, Canada

If you want to consider some commodities or hard assets, that’s fine too. Stick with marketable commodities like gold, silver, oil, and timber – things like that. Again, they should only occupy a small (3 -10%) portion of your total portfolio and they should be considered a hedge against your cash positions and positioned/allocated accordingly. A strong dollar equals a weak commodities market, but the commodities market will rise when the dollar falls – something to keep in mind…

Speculation

This diamond lesson is a lot like the bitcoin lesson just months ago. During bitcoin mania folks were selling out of traditional asset classes like stocks and bonds and going overboard with bitcoin in an effort to “get rich quick” and “capture the wave”. It was FOMO investing pure and simple. 

Even as I recommended bitcoin, I never recommend more than 10% of your available cash or 3-5% of your total investment portfolio. During the mania I saw people cashing out of their IRAs and buying bitcoin in percentages that would far overweight them to an asset they could barely explain. No bueno… Even today, there is nothing wrong with investing in bitcoin if you believe in the opportunity, just size it properly in your portfolio and consider it for the speculative investment it is.

Allocation

Drew Brees has a lot more money to invest with than most. Even so, a $15M investment in a speculative asset like diamonds should occupy around 3% of his total portfolio. Brees would have to be running a $500M portfolio for this to even begin make sense on an investment allocation level. I think he was way off on his allocation to diamonds, which were a stupid investment play call to begin with. This strategy ended up occupying way too many pages in his playbook. It should’ve been a Hail Mary pass, not a integral part of his offensive scheme.

Broad and Basic

Lesson learned. Stay broad, stay basic, and keep your allocations in check. Don’t go for the Hail Mary or the home run and overweight your investments into alternative investment classes that can swing wildly or have a limited market, no matter how “hot” they may seem. Don’t deal with shady diamond merchants and don’t shove diamonds up your butt, or into your portfolio. Buy things you can understand and explain to your next door neighbor after 2 beers and 3 cheeseburgers. You could easily explain to him why you’re buying an ETF composed of highly rated corporate bond debt issued by large companies he has heard of, but do you think he’s going to buy a piece of carbon you pull out of your… “pocket“?

Cheers, thanks for reading!

 

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