Sunday, May 3, 2009

How a Management Consultant Buys a Diamond

Maxim 1: A management consultant solves analytical economic problems to create value.

Maxim 2: Value is created by maximizing what the client "gets" versus the cost.

Maxim 3: When buying a diamond, a guy wants to maximize the amount of diamond while minimizing the cost.

Conclusion:  A management consultant can teach you how to get a better diamond for less money.
The first thing to recognize is that a diamond is a commodity, like corn or wheat.  It's not like adopting a baby, or picking a wife.  If you get caught up in the marketing BS from Kay's Jewelers, you might as well stop reading now since you're going to pay above-market price for a below-market diamond.

The Six Factors to Consider

1)  Carats: Diamonds are constant density, so this is a measure of the volume of the diamond.  Bigger is better and costs more. (we will come back to this).  Hugely important

2) Color: Color is graded from D-Z.  Lower letter means less color, which is better and costs more.  Generally between G-I is where it looks totally clear unless you look really really closely.

Just depends on what color your woman wants.
3)  Clarity: It's NOT what you think.  This clarity refers to occlusions, or imperfections in the diamond.  Less imperfections is better and costs more.  At around SI1, you can ask and see if a diamond is "eye clean" - that is, you can't see with the naked eye any occlusions. Beyond that standard you're talking about whether you can see occlusions under a microscope.

If your chick is scoping your diamond, you got bigger problems than occlusions. 
4) Cut:  Round, emerald, etc.  Round is the most popular, but you gotta figure out what she wants.  But round is really important for...

5) Cut (part 2):   Diamonds are rated on the QUALITY of their cut.  The higher the quality, the more that sparkly, or "on fire" they are.  The terms used vary by jeweler, but generally the highest quality is deemed "Ideal Cut." There is a huge tradeoff between carat and this cut.  You can get a huge rock that looks like a piece of granite, or a small piece that looks radioactive, probably for the same price.  
My personal opinion is that getting better cut and a smaller diamond is the way to go.  Quote from my wife's co-worker during a meeting:  "I'm sorry, but your ring keeps distracting me because it's so sparkly".
6) Cut (part 3): If you really want to maximize your savings you have to understand how jewelers rate cut quality.  Symmetry of the cut, polish, girdle thickness go into it, but also (and most crucially) the dimensions of the diamond.   There is an optimal mathematical relationship between the width, height, and table that maximizes the reflection of light (and thus creates that "on fire" look).  Here's where it gets really interesting.  Essentially a diamond looks like this:
Focus on these 2 numbers:
  a) Table:  Width of the table (typically described as a % of Max Width)
  b) Depth:  Total height of the diamond (typically described as a % of Max Width)

Consider this.  These %s describe the mathematical relationships between them that defines an "ideal" cut, with ranges for each.  But the ranges ALSO define volume, which defines carat, which drives cost!  

So, think about it;  if you have a diamond that has those numbers within the ideal cut defined ranges, but the:
  a) the face is on the small end of the range for ideal (52.4% - 57.5%)
  b) the depth is on the small end of the range for ideal (59%-63%)

The result is a diamond that is ideal cut, but that is wider and flatter than other ideal diamonds of the same carat count.  But here's the thing.  Your woman is not going to look at the table or depth of a diamon they only look at the width!  By optimizing this, your woman gets a bigger looking ring and you spend less money.

Last point.  There's also price variations by dealer.  I spent ~40 hours looking at rings online, comparing the prices at different vendors, and the cheapest one I found was - about 3-4% cheaper than the next best source I could find, including the diamond district options here in New York.  I don't have any relationship with them, other than the fact I bought my ring there and saved myself some cash, without any customer service issues.

So that's how a management consultant buys a diamond ring.


Anonymous said...

good luck man!

Steve Shu said...

FWIW - one of the students at UCLA pointed out this website in a branding-related class

Other than the commodity angle, some other things I was "told" (of course more than 1 decade old info):

a) Buying a few points under the breakpoints (e.g., 98 points instead of 1 carat, or 1.48 carats instead of 1.5 carats) helped to save some money.
b) If buying a tone that is seen from the top mostly, getting an American cut with a slightly wider table might be away to go. More extremely, some European cuts have the stone mounted low with the bottom portion of the diamond whacked off so if you want to get more carats of stone (perhaps less optimal internal reflections though) with the stone mounted low, the stone still looks pretty large from the top.
c) expect marquis-cut stone about 15% more than round cut
d) may get a slightly florescent stone (but not too much or cloudy) to maximize money

Also try to take a look at Rappaport sheet (sp?) ...

Steve Shu said...

Also, if you make it down to NJ, this is the guy I bought my wife's diamond from some 15+ years ago.

Steve Shu said...

James Barlow said...

If you'd given the client the following advice:

Take half your diamond budget and invest it in collateralised debt obligations, and spend the rest on lap dances.

you'd be more in tune with recent trends in management consultancy.

forex guides said...

Now thats a very helpful guide.. Its very educational

forex guides

Robbie said...
This comment has been removed by the author.
Robbie said...

The best way to save money on a diamond is (obviously) not to buy the diamond in the first place. Diamonds are not particularly rare, just tightly controlled and well marketed.

The next best way would be to try to procure one on the almost non-existant second-hard market, and save upwards of 60%.

Both insights come from this long but worthwhile article from The Atlantic in 1982. It spells out how DeBeers created the diamond market in the early 20th century based purely on size. Following the entry of the soviets into the market (whose diamonds were mostly 0.5 carat and under), DeBeers created the idea of quality (the c's) in order to stimulate demand for the smaller diamonds.

Sunday, May 3, 2009