Monday, April 5, 2010

Engagement ring selection -- guy's prespective

Cardboard, tube, duct tape, done.  No, seriously.


Okay, fine, that will probably not win you any points with the significant other.  To be able to buy the right engagement ring, you have to first understand the fact from fiction; the reality from the myth.  The guideline of "an engagement ring should be 2-3 month of one's salary" is a myth.  This was an amazing marketing campaign created by De Beers to sell what at the time was an abundant supply of diamonds.  Of course, the question men always wanted to reply with, but were afraid to was, "is that before or after social security and tax deductions?"

Of course, when you control over 80% of the world's supply of anything, you can easily control the supply/demand curve and make any product as rare as you want.  Let's be honest, carbon is the most abundant element in the world, and technology has advanced to a stage where you no longer need an active volcano to create the pressures necessary to create a diamond.  Man made diamonds have reached the quality of natural diamonds, and have found many industrial uses.

Most diamonds are also found in areas where there are wars -- hence conflict diamonds.  Although some companies charge a premium for a "conflict free" diamond, there is really no way one can tell.  Diamonds change hands so many times during the supply chain that unless the wholesaler also owns the mine, no one really knows. In other words,  yup, this is just another marketing gimmick that allows the diamond monger to sell you a regular diamond at a premium.  The parallel I can draw with diamonds is cocaine.  They are harvested by day laborers in 3rd world countries for pennies a day only to be refined by a solvent (many times gasoline) and sold to the US market for a incredible mark up.  The only difference is the mark up for cocaine is to compensate the suppliers for the risk of getting the product to your neighborhood drug dealer.  Diamonds are legal!

Choosing a diamond

So your soon to be fiancée insists she wants the rock.  How do you go about finding the right one?  There are the famous 4-Cs to look out for: cut, clarity, carat, and color.  Based on my experience, most girls will really care about only two of the four Cs: cut and carat.  Most girls associate bigger diamonds with being more expensive.  The cut, which really depends on the quality and experience of the diamond cutter, brings out the brilliance and sparkle of the rock.  I'm not suggesting you go out and get a poor color rating diamond with large inclusions, but as long as you stay within the ranges I suggest, your girlfriend will not be able to tell the difference.

In terms of color, there is no visual way one can tell one grade of color from the one above (or below) without a reference.  Even when they are sorting the diamonds the employees at De Beers use reference stones to compare with.  With D being colorless, you can easily go down to H or I without any visual indications.  D-F graded diamonds are considered colorless, and G - I are considered near-colorless, and anything below, you're playing with fire.  The price differential between a D-grade diamond and a H-grade diamond is very significant.  Taking into consideration the other three Cs are constant, the differential can save you thousands of dollars, if not more.

Clarity is important but only to a certain point as well.  Flawless is the MOST expensive diamond you can possibly buy, and unless your girlfriend carries around a 10x magnifying glass with her all the time, she will never notice the difference from a lesser quality stone.  You can easily stray to a VS1 without any real problems.  Again, if you go to a lower quality stone in the SI-1 and SI-2 range, you're playing with fire.  Nothing ruins a girls day as when they are showing off their newly acquired rock to their friends, and they can see, with their naked eye, a huge crack inside the rock.  Ideally, if you can spring the extra cash, go for the VVS1.  Just beware, a Flawless rating can easily cost double of a rock with a VVS2 rating.  Lastly, no matter how hard your girlfriend tries to keep the rock clean, the rock will always quickly loose its sheen due to the body's natural oils as well as dirt and dust.  A D-colored, flawless diamond that sparkled when you first presented it to her can look dull less than a week later.

The carat of the rock is pretty self explanatory.  Holding all else equal, the bigger the diamond is, the more expensive it will be. Oh, and the fatter fingers your future fiancée has, the smaller the rock will look on her hands.

Another thing to keep in mind, there is no "ideal" cut for square or princess cut diamonds, cushion cut diamonds, or any other "designer" cuts.  Generally they are also cheaper than a round cut diamond.  The reason is you have to cut through more "raw" materials to create a round diamond of the same carat.  A good example would be to think of the Domino's Pizza you get.  The pizza (which is round) is always smaller than the box, which is square.  For them to create a round diamond, they will have to cut away all the excess materials of the box whereas with a princess cut they could have saved and sold.

Pricing a diamond

Now that you have a basic understanding of the rock, you need to know where to find it.  This is really simple as well.  Don't go to Tiffany's.  For the exact same product, Tiffany's will charge you at least a 50-100% premium for you to have their brand on their product.  I understand Tiffany's has spend considerable money and resources to built up that brand, but I'm still not willing to pay for that privilege. Use wholesalers like Derco and Bluenile.  You can still use a Tiffany's style setting if you really want to.

There is some similarities between buying a car from a dealer and buying a diamond from a wholesaler.  For both, older inventories tend to be priced cheaper, although because of different reasons.  With automobiles, inventory that the dealer carries on the dealership lot cost them interest every day the vehicle is not sold, in addition to the car being a depreciating asset.  Although this does not apply for diamonds (they already have been around for millions of years), the whole sale price is set every quarter and indexed to both demand and inflation (which translates to the a diamond of the same quality going up in price year after year).  That wholesale price is the price your merchant paid out of pocket for the diamonds.  Because of this, buying a rock that has been in the inventory longer will guarantee you a greater discount because the cost of goods sold ("COGS") is less for the merchant. In other words, if the merchant paid less for something, he is more likely willing to pass the additional discount to you, or at least split the difference to make a sale.

Verification of diamond quality and summary

Before you spend the money on the rock, be sure to ask for a GIA certificate.  All reputable diamonds above a certain quality will have a certificate confirming the quality of the diamond.  The GIA certificate will also mark out on the pamphlet clearly any internal imperfections, or inclusions, that the rock may have.  Let's also be honest, unless you are professionally trained, it's always good to review materials prepared by a professional about the quality of the diamond you will be purchasing.  Think of the GIA certificate as the Kelly Blue Book ("KBB") of the diamond trade.

Another thing to watch out for is Florescence.  This may not be a big deal and a GIA certificate will either confirm or disprove the the diamond you intend to purchase does not have florescence.  Although you may not notice it in the store, florescence is bad.  Essentially it will change the way the diamond reflects the light and it may look off hue and not sparkle as much as a comparable diamond that is not florescent.  Some salespeople may try to convince you that a florescent diamond is desirable, but don't be fooled.

Based on the guidelines I have set above, you should be able to easily swing a 1.25 carat, E-color, VVS2 clarity, and ideal cut round diamond for no more than $13,000 wholesale.  A platinum setting should set you back no more than $1,000.  Based on variables you are willing to change, you can even squeeze in a 1.5 carat, G-color, VS2, and ideal cut round diamond for not much more.  If you go with a diamond of the same size and quality at Tiffany's or Cartier, expect the price to be easily double of wholesale as you pay the premium for the brand.

Good hunting.  If all else fails, go with the cardboard box ring.

Update: I have written more about the cut and selection process of a diamond here.

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