Experts - 1) How efficient is the diamond market today? 2) Evaluate my buying strategy

[Guess]

Being a scientist, I carefully read the indepenant lab certification comparison, and found it very interesting. Thanks to all who made it possible.

If you don''t know what I''m talking about See http://grading.pricescope.com/

So I recently bought by diamond, a GIA certed stone b/c my girlfriend had previously mentioned that she had heard "the other labs were less reputable" and I thought it best not to dispute this, but follow her wishes. After all I am buying it to make her happy.

However, here is the buying scheme I cooked up and wanted to hear what you all thought.

Based on the 2004 report, it seemed like the EGL discount was greater than it should be because peoples'' perceptions of EGL laxity in grading are inflated. 4 of the 17 stones (11,12,15, 16) were graded the same or stricter than GIA by EGL and three of the stones(10,7,6) traded a color grade for a clarity grade - we''ll call this a wash.

Therefore, I was thinking about having 5 or so EGL rated, AGA 1a proportioned, stones sent to an appraiser for their opinion on color and clarity alone. Statistically, EGL should have rated one of these stones the same or stricter than GIA and I could benifit from the 9%-15% discount without settling for a weaker stone. I bet that this discount would be larger than the appraiser fee for stones in the 1ct and higher range.

 

[diamondseeker2006]

If vendors are calling in those stones, I'd imagine you'll be paying for some shipping and insurance for them as well as the appraiser fee. They don't just normally go to the expense of calling in multiple stones for no fee to the buyer. There's a chance you could accomplish your purpose, but you may not come out all that much better than you would just looking at GIA/AGS certified in-house stones and paying for the better cert plus photos and other tests on the stone.

(I'm no expert if you mean professional...but I have spent about a million hours searching for my own diamond!)

 

[mrssalvo]

seems like a lot of work and expense to try and save $ to me. I'd rather just pay a little more and buy from a trusted vendor a stone that already has a GIA or AGS cert. There are great EGL stones out there for those who have the patience to look but the cream of the crop stones are always sent to AGS or GIA.

oops..just realized you're asking for experts...that i am definitely not

 

[pricescope]

Guess, great to see another scientific soul here...

I don't want to say bad about any lab but there are too many variables that might be difficult to predict.

Since the time we did the survey, the situation with strictness could have changed because of different reasons including changing of the management teams in both GIA and EGL USA labs. However, price difference is still in favor of GIA graded stones for about 10%-15%.

There are also some other things/tricks like pre-grading that wasn't considered in the survey. The owner of the diamonds can ask for pre-grading info and then dispute it with the lab demanding better grades. Sometimes vendor succeed sometimes not. Manufacturers and wholesalers know how to do that and which lab can give a better grade and for which particular grade.

It's probably possible to analyze statistically but not on 17 stones.

One former grader even told me that grading accuracy can depend on the day of the week (because eyes of the graders get tired closer to Friday). It can be just a myth though.

 

[Guess]

OK, for the sake of this example, lets assume I''m in the market for a $10,000 EGL stone and that the trends from 2004 still hold. Lets also assume that a 12.5% discount is in place. Therefore if I find a stone that would be rated the same or better by GIA, it would be worth $11,429 (or more) and I would "save" $1,429 (or more). For simplicity, I''ll won''t consider stones that are rated stricter in clarity but laxer in color.

You all bring up some very good and valid points.

1) I don''t know what I would need to pay for shipping/insurance fees. I guess it would come down to how much a merchant was willing to work with me. I don''t know what level of costs are incurred when a retailer calls in a stone from their supplier (maybe some retailers could chime in). However, I could envision situations where a good internet retailer, understanding the limits of the internet, would be willing to work with me and send a couple stones out to a trusted appraiser to compare. I might have to convince that retailer that when all was said and done, I was going to spend $10,000 on one of them, but that would likely be the case. Retailers, if I offered to pay an extra $150 for this service, would you accept?

2) Yes I would pay some additional appraisal fees. However, I am paying to have one stone thoroughly inspected anyways, in this scenario I would simply be paying for a quick comparison of the five first. I assume that a good appraiser could take 5 EGL G VS2 stones, place them upside down next to each other and pick out the two-three whitest in a couple minutes. Another 20 minutes with a loupe or scope and they could determine whether GIA would also have rated those two to three stones as a VS2 as well(although from the 2004 study it seems that EGL is generally as strict or stricter when it comes to clarity). So if this whole process of evaluating the extra stones takes my appraiser a generous 1 hour, I''ll owe an extra ~$175.

3) I fully accept that the sample size from the 2004 study is quite low, making it difficult to draw any conclusions at high confidence levels. However, it is the best set of numbers that I, as a consumer, have to work with. I chose 5 stones because I though that this would probably be the limit a retailer might even consider sending (although again, I haven''t run it by any and I''m not sure that they would). IF the 2004 stones were truly a representative sample and we could be confident in the 23% chance of getting an EGL stone that would be the same or better rated by GIA, then 5 stones would be enough. Of course, this is not the case. However, if I''ve spend $325 dollars with the potential to save $1,429, then at the end of the day, I only need a 5% chance of getting an EGL stone that would be rated the same of better than a GIA to stay even on costs. (i.e. if only 1/20 (5%)were the same or better, then the comparison of 5 stones would have to occur 4 times to be sucessful. I would have spent 4(325) = $1300 to save $1429. Maybe the chance is not as high as 23% but I doubt it is as low as 5%. This is the risk I would have to be willing to take. My memory of stats is not good enough to crunch the numbers for real.

Here''s what would be the downfall of this plan. In an efficient market, a supplier/retailer who thought EGL had graded a stone extremely strictly (for them) would be in a better position to evaluate it and potentially send it out for a regrade by GIA or AGS than I would. Why sell it with the EGL discount when you could sell it for 10-15% more? Working with a large number of stones, they can play the statistical averages much better than I can. If a cert costs about $150 and the oppurtinity to make an extra $1429 dollars or more is there, then they don''t even need to be that good at picking misgraded stones, they could tolerate a high error rate. Sure, sometimes they''ll randomly be getting a more favorable cert, sometimes a less favorable, but for enough stones, the variability will balance. The result would be that strictly graded EGL stones are often recerted, and rarely sold as EGL stones, causing the EGL lax grading repution become a self-fulfilling prophecy. Industry insiders, does this happen? It seems to me like it could be worth a retailers time -- for those who already carry a physical inventory that they can examine like WF or GOG.

Ultimately, the opportunity to save money is probably here in my opinion. However, even if it didn''t work out, the very sweet consolation prize is that you had your appraiser look over five stones and pick you out the very best one... at a cost of $325, not too shabby.

Yes, I have made a lot of assumptions and carried them through the example. If you think they are erroneous, please chime in, I''d love to hear your opinions - especially if you have more definate numbers on costs.

From a business standpoint, this could be an interesting catch-22 for EGL. 1) if they switch to grading as strictly as GIA, but the market is slow to realize/respond by abolishishing the "discount", then few people would want their stones certed by EGL. Reputations are hard to shake, I would not be surprised if this could happen 2)if they continue to grade stones more laxely, then they re-enforce a lax reputation reducing their credability and educated consumers might not want to buy EGL stones - again meaning that people might not want their stones certed by EGL. Diamond consumers appear to be becomeing more educated through sites like these as time goes on. Thoughts?

Yes, a truly educated consumer in an efficient market might decide that buying EGL was worth the discount, but most people think it is a gamble and I bet more future fiances a risk adverse when it comes to buying their loved one a diamond (I did after all buy a GIA certed stone myself) I appologize for being so long winded. As I have already bought my stone, this is a purely academic inquiry, but I am quite curious what those in the diamond trade think.

 

[Regular Guy]

Guess, I''m not in the industry, you''ve bought your diamond, so I guess we''re both just chewing the fat. Be that as it may...a few thoughts:

1) There are procedural issues with identifying diamonds with certs from EGL USA vs EGL. Referencing the db here...you''re doing this work yourself, or having some vendor do it for you (I suspect they are as blind as you to their lists until they pick up the phone, actually)?...you first have to find among diamonds marked as EGL which ones are EGL USA

2) Identifying diamonds as AGA1a...now...how do you do that with the reliability you want. Diamonds with EGL certs are known to be measured with associating rounding error. Say you are able to figure out the sweetest spot in the center of both the purported measurement from EGL, and then also match that with AGA 1a. Do you need your chosen appraiser to confirm this for you....that you''ve found a diamond that conforms to those measurements?

I was on the phone yesterday with PGS in Chicago. I am a curious guy with not enough to do, apparently. I wanted to know how good their proportion measuring apparatus was. They do appraising and grading, so they should be pretty good. You''d think they would even want to make known the fact of how good they are. Truth be told, I''m probably not an effective interviewer, but I couldn''t get them to tell me. I revealed that their competitor down the road also had sarin (PGS did reveal they used sarin), but they wouldn''t specify as to the relative caliber of their apparatus. So...maybe it''s good enough that some sarin is in use. But...if you need a beaucoup sarin...there may only be one appraiser in the county who offers this, and lets you know it. You''re doing due diligence with this experiment, right?

3) Including BATNA, procedurally, in your experiment, it seems to me, would be critical. You''re not just looking for the best of the five, right, but you are also hopefully willing to entertain, as you wisely consider here,

Date: 7/29/2006 10:05:57 PM
Author: Guess
the downfall of this plan. In an efficient market, a supplier/retailer who thought EGL had graded a stone extremely strictly (for them) would be in a better position to evaluate it and potentially send it out for a regrade by GIA or AGS than I would. Why sell it with the EGL discount when you could sell it for 10-15% more? Working with a large number of stones, they can play the statistical averages much better than I can. If a cert costs about $150 and the oppurtinity to make an extra $1429 dollars or more is there, then they don''t even need to be that good at picking misgraded stones, they could tolerate a high error rate. Sure, sometimes they''ll randomly be getting a more favorable cert, sometimes a less favorable, but for enough stones, the variability will balance. The result would be that strictly graded EGL stones are often recerted, and rarely sold as EGL stones, causing the EGL lax grading repution become a self-fulfilling prophecy. Industry insiders, does this happen? It seems to me like it could be worth a retailers time -- for those who already carry a physical inventory that they can examine like WF or GOG.

Ultimately, the opportunity to save money is probably here in my opinion. However, even if it didn''t work out, the very sweet consolation prize is that you had your appraiser look over five stones and pick you out the very best one... at a cost of $325, not too shabby.

...you''ll want to consider even the low probability that the best of the five is not as good as you''d like it to be So, I think you want the appraiser to also have available to them a safe option to compare these still 5 theoretical options against, on the chance that your idea really did not work out after all, and you will have needed the proven option from GIA or even AGS to compare these against. Unfortunately, I don''t think appraisers are able to work against theoretical threshold points very well. I think they can pick out the best of the bunch, but will have difficulty also saying...though these are all not bad, none cuts the muster.

Final thoughts....although you may have a strategy in mind to save some money...and the idea of going against the grain may pay off...there should be an acknowledgement that you are going against the grain at the outset, first of all, and second of all, I''m skeptical. WF will not upgrade diamonds they will sell from EGL. James Allen used to sell EGL stones, but does not any more. Leonid helped fund a study that he will not today back reasonable follow ups with excitement. Time is frequently worth money (didn''t Einstein figure that out?), and given the efforts necessary to work this up...stretching to include GIA in consideration for an option over AGS is as far as I would readily go. But the idea''s worth pondering, no doubt!

Regards,

 

[DiamondExpert]

My guess is that the market is more efficient than you give credit. I would have to believe that the odds of you as an end user finding a stone with as much potential profit left in it by vagaries in the grading of certain grading labs are vanishingly small. While mistakes are made sometimes, such discrepancies have usually been identified at the wholesale and retail levels, and the profit will not be there for you. Furthermore, your appraiser could also be wrong, so unless you can actually SELL at a profit, you won''t know if you have been successful...and as an end user THAT will be difficult!

 

[orbaya]

Just a quick question....why concern yourself with all this EGL stuff when your girlfriend expressed that she wanted a GIA stone. It sounds like that the lab report is important to her so I''d just stick with that. Or, you can tell her (if you have''t already) that you are looking at EGL stones and why.

 

[Regular Guy]

Date: 7/30/2006 10:05:49 AM
Author: orbaya
Just a quick question....why concern yourself with all this EGL stuff when your girlfriend expressed that she wanted a GIA stone. It sounds like that the lab report is important to her so I''d just stick with that. Or, you can tell her (if you have''t already) that you are looking at EGL stones and why.

In his defence, he says:

"So I recently bought by diamond, a GIA certed stone b/c my girlfriend had previously mentioned that she had heard "the other labs were less reputable" and I thought it best not to dispute this, but follow her wishes. After all I am buying it to make her happy.
However, here is the buying scheme I cooked up and wanted to hear what you all thought."

Looks like he''s just speculating. I was interested. So were you!

 

[Cehrabehra]

Date: 7/30/2006 10:21:58 AM
Author: Regular Guy

Date: 7/30/2006 10:05:49 AM
Author: orbaya
Just a quick question....why concern yourself with all this EGL stuff when your girlfriend expressed that she wanted a GIA stone. It sounds like that the lab report is important to her so I''d just stick with that. Or, you can tell her (if you have''t already) that you are looking at EGL stones and why.

In his defence, he says:

''So I recently bought by diamond, a GIA certed stone b/c my girlfriend had previously mentioned that she had heard ''the other labs were less reputable'' and I thought it best not to dispute this, but follow her wishes. After all I am buying it to make her happy.

However, here is the buying scheme I cooked up and wanted to hear what you all thought.''

Looks like he''s just speculating. I was interested. So were you!

I''m interested too... however my thought is that I''m not afraid of EGL stones, just that I''d tighten my requirements... maybe looking for an H VS1 when I know I want a J SI1 I figure my bases would be covered. I think as long as you *know* what you''re really getting, the cert itself only means so much. I don''t think you need to go through all of what you listed, particularly if you trust the eyes of your vendor to say, "Yeah it says E but it''s really an F" - as long as you''re happy with an F, does it matter if the cert says an E?

 

[strmrdr]

Date: 7/30/2006 2:36:48 AM
Author: DiamondExpert
My guess is that the market is more efficient than you give credit. I would have to believe that the odds of you as an end user finding a stone with as much potential profit left in it by vagaries in the grading of certain grading labs are vanishingly small. While mistakes are made sometimes, such discrepancies have usually been identified at the wholesale and retail levels, and the profit will not be there for you. Furthermore, your appraiser could also be wrong, so unless you can actually SELL at a profit, you won''t know if you have been successful...and as an end user THAT will be difficult!

yep well said.

 

[Guess]

Ira,

You definately bring up some key weaknesses I hadn''t fully thought out that would make this kind of plan hard to enact. I guess that I would rely on my vendor to discriminate between EGL USA and EGL. As far as the cut goes, I would have to pick stones that were as close to middle of the AGA 1a range as possible and then hope to have the appraiser verify it as best they can. I am unfamiliar with what BANTA stands for, but I agree that including a stone from another lab as a backup in case none of the 5 worked out would be prudent. Appraisers may have trouble working against theoretical threshholds, but do they not have reference stones? I read somewhere about "master stones" - are these for a different purpose?

Surely this plan might be more work than its worth - another reason why I''m not actually doing it. However, considering the amount of time I''ve spent educating myself, and researching diamonds and settings, implimenting this would be a small percent of total time spent.

I havn''t been around long enough to have heard Leonid talk about not wanting to follow up. Did he give a rational why not? I could anticipate many reasons why
1) Not worth the time and expense
2) The grading labs didn''t like the first study and he doesn''t want to make enemies
3) Grading is much less consistant than anyone realizes and so to make an accurate comparison between labs, one would need an unreasonable sample size. To use a small sample size again might yeild contradictory conclusions and call the accuracy of both studys into question.
4) Sumbiting stones to the same lab over and over again might prove how inconsistant grading is, which in turn might rock the boat too much.
5) He doesn''t feel like it

Any and all of these reasons are perfectly legitamate, I just wonder why.

Gary,

My baseline assumption is always that markets are efficient. When they''re not, there''s an opportunity for someone to step in and make money, and they generally do. I agree that I would be the last person in the foodchain with that opportunity. I assumed this for the diamond market until I read the 2004 study. The 2004 study shows that 4//17 stones would likely have been priced with the EGL discount when GIA certed them the same or better. I consider this inefficient. The study says "Discounting of EGL graded diamonds was greater than any premiums as a result of softer color grading" In an efficient market, the discount should equal the premiums from color gradings and if you tallied up what the stones would sell for with stricter GIA certs it should equal what they would sell for with the discounted but better rated EGL certs. This was not the case. The only way to reconcile both an efficient market and the study results, is to throw out the study results based on small sample size high variability in grading from one submission to another. This would be all the more reason to think about running a larger, more controlled study.

 

[orbaya]

Date: 7/30/2006 12:26:10 PM
Author: Cehrabehra

Date: 7/30/2006 10:21:58 AM
Author: Regular Guy

Date: 7/30/2006 10:05:49 AM
Author: orbaya
Just a quick question....why concern yourself with all this EGL stuff when your girlfriend expressed that she wanted a GIA stone. It sounds like that the lab report is important to her so I''d just stick with that. Or, you can tell her (if you have''t already) that you are looking at EGL stones and why.

In his defence, he says:

''So I recently bought by diamond, a GIA certed stone b/c my girlfriend had previously mentioned that she had heard ''the other labs were less reputable'' and I thought it best not to dispute this, but follow her wishes. After all I am buying it to make her happy.


However, here is the buying scheme I cooked up and wanted to hear what you all thought.''

Looks like he''s just speculating. I was interested. So were you!

I''m interested too... however my thought is that I''m not afraid of EGL stones, just that I''d tighten my requirements... maybe looking for an H VS1 when I know I want a J SI1 I figure my bases would be covered. I think as long as you *know* what you''re really getting, the cert itself only means so much. I don''t think you need to go through all of what you listed, particularly if you trust the eyes of your vendor to say, ''Yeah it says E but it''s really an F'' - as long as you''re happy with an F, does it matter if the cert says an E?

I guess I read the post differently! I was thinking that he was considering returning the stone and trying to find an awesome EGL deal. That''s what I get for staying up half the night!

 

[oldminer]

It would be accidental if you happened to save any money of importance after paying shipping on several diamonds. The shipping gets costly and probably would eat up much of any potential savings although your goal is a worthy one.

The thing about buying a diamond to please someone else is partly true, but which "cert" comes with it ought to have nothing to do with the gift. Long after the paper is hidden away in a drawer, it is only the your mutual relationship symbolized by the diamond that gives lasting enjoyment. No one cares about the "cert" except for a fleeting moment in time, and then it is meaningless. The gift is your faithfulness to your partner and the diamond is a symbol in our society of the depth of your committment.

The truth is that you give a diamond engagement stone to please BOTH of you. It is far from a one way street. Don''t even go there if both of you won''t feel that you are coming out better by making this joint committment to your future. Saving some money is always part of the financial game, but just decide on a budget and buy a beautiful stone which pleases both of you.

 

[Regular Guy]

Date: 7/30/2006 1:59:14 PM
Author: Guess
Ira,

You definately bring up some key weaknesses I hadn''t fully thought out that would make this kind of plan hard to enact. I guess that I would rely on my vendor to discriminate between EGL USA and EGL.

Maybe a vendor would do this; not sure. One (the only one I can think of?) resource to begin to do this would be to look to the Pricestats db here. I actually have another thread here recommending/discussing this sort of idea here, and this notion is imbedded im the shopping strategies I note below my signature.


As far as the cut goes, I would have to pick stones that were as close to middle of the AGA 1a range as possible and then hope to have the appraiser verify it as best they can. I am unfamiliar with what BANTA stands for,

you can read about BATNA here

but I agree that including a stone from another lab as a backup in case none of the 5 worked out would be prudent. Appraisers may have trouble working against theoretical threshholds, but do they not have reference stones? I read somewhere about ''master stones'' - are these for a different purpose?

Yes and no. The purpose of what''s usually called a "master stone" set is to judge color, only, I think. But...a) some master stone sets are specifically known to be from Lazare, and b) might be also used to judge cut, but c) I think a separate project Garry Holloway and others on this board are cooking up is to have a "reference stone" set, as you say, that could be used to help judge cut. In either case, I''ve tried to advocate appraisers do have such a set. Until then, a customer, from my point of view, might actually do best by going to a jewler/appraiser who would actually have a bunch of stones you could look at and compare your chosen diamond against, and you might or might not work out an agreement in advance of your relationship, stipulating as to whether or not you could buy any or not. If you work it out you could not buy one of them, you''ve artificially turned them into an independent appraiser.

Surely this plan might be more work than its worth - another reason why I''m not actually doing it. However, considering the amount of time I''ve spent educating myself, and researching diamonds and settings, implimenting this would be a small percent of total time spent.

I havn''t been around long enough to have heard Leonid talk about not wanting to follow up. Did he give a rational why not?

Leonid = Pricescope, who responded to you above. I only imputed a judgment from him, based on his comments above.