They say you have to spend money to make money.

While this is technically true, every time you spend money does not guarantee that you will garner a return. It’s important to invest smart without making rash decisions based on hype. But of course to always be ready for what opportunity comes screaming by. You can buy books. Talk to your friends or financial advisors. Read articles from financial magazines. But in order to fully see your potential as a business-savvy investor, sometimes the best tips come from unlikely sources.

Gary Kessler is a friend of mine who owns a luxury jewelry store right here in Lubbock. Gary and I go way back, to my days at being a Assistant Branch Manager at a local bank. We both have the same amateur niche hobbies in collecting and he began to favor my handling of his business since the conversations inevitably always led to decorative keys and vintage matchbook covers. One day, after talking for three hours about the structure of quatrefoils, I asked him how he got started in his business. Turns out, my friend Gary was quite the proficient investor and it was in his career as a jewelry store manager that he was able to discover his own secret way of doing it right.

“I judge investment opportunities the same way I would judge the quality of a diamond. You look at the carat, the cut, the color, and the clarity. Those are the 4 C’s. If you need any more factors than that, then you should probably get out of the investing business …and for that matter, the diamond business! HA!”

I sat down with Gary and together, we analyzed it further:

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Carat

The carat weight measures the mass of a diamond. One carat is defined as 200 milligrams (about 0.007 ounce avoirdupois). The point unit—equal to one one-hundredth of a carat (0.01 carat, or 2 mg)—is commonly used for diamonds of less than one carat. All else being equal, the price per carat increases with carat weight, since larger diamonds are both rarer and more desirable for use as gemstones.

Diamond (gemstone) — Gemological characteristics. (n.d.). In Wikipedia. Retrieved August 11, 2015, from https://en.wikipedia.org/wiki/Diamond_(gemstone)#Gemological_characteristics

How do you measure the mass of a company? Its idea. What’s the angle? Does it solve a problem? Maybe it solves a problem that you’re unaware is a problem. The greater the problem it solves, the more rare it is and thus, the more desirable it is, much like the carat of a diamond. The bigger the idea, the bigger its potential. Small ideas may make sense to some people, but not for the serious investor.

Cut

Diamond cutting is the art and science of creating a gem-quality diamond out of mined rough. The cut of a diamond describes the manner in which a diamond has been shaped and polished from its beginning form as a rough stone to its final gem proportions. The cut of a diamond describes the quality of workmanship and the angles to which a diamond is cut. Often diamond cut is confused with “shape”.

Diamond (gemstone) — Gemological characteristics. (n.d.). In Wikipedia. Retrieved August 11, 2015, from https://en.wikipedia.org/wiki/Diamond_(gemstone)#Gemological_characteristics

The execution. Having an idea for a company means nothing if you can’t utilize it correctly. When weighing the risks of several different companies than might more or less do the same thing, it’s important to see how each one tackles the problem differently. When Netflix was up against Blockbuster (remember those?) both companies promised means to deliver movies to the comfort of your own home. The edge for Netflix was the idea that not only could you watch movies from home, but you don’t even have to leave the house at all, and thus became the victor. The execution of a company is an art of creating gem-quality services out of rough ideas.

Color

The finest quality as per color grading is totally colorless, which is graded as “D” color diamond across the globe, meaning it is absolutely free from any color. The next grade has a very slight trace of color, which can be observed by any expert diamond valuer/grading laboratory. However when studded in jewelry these very light colored diamonds do not show any color or it is not possible to make out color shades. These are graded as E color or F color diamonds.

Diamond (gemstone) — Gemological characteristics. (n.d.). In Wikipedia. Retrieved August 11, 2015, from https://en.wikipedia.org/wiki/Diamond_(gemstone)#Gemological_characteristics

The visual branding should be flawless if you’re going to consider investing. A career investor should not take any company seriously if the design of the company doesn’t take itself seriously. They could be the next Microsoft but if it looks like they operate out of the back of a rusted out ice cream truck, you will be the only investor and the company will collapse with your money locked in it. Serious logo design is key. Consistent branding across their presentation is also key. The finest looking companies poised for success are ones that are without blemish. When you invest, you should feel proud to display their logo in your own office.

Clarity

Clarity is a measure of internal defects of a diamond called inclusions. Inclusions may be crystals of a foreign material or another diamond crystal, or structural imperfections such as tiny cracks that can appear whitish or cloudy. The number, size, color, relative location, orientation, and visibility of inclusions can all affect the relative clarity of a diamond.

Diamond (gemstone) — Gemological characteristics. (n.d.). In Wikipedia. Retrieved August 11, 2015, from https://en.wikipedia.org/wiki/Diamond_(gemstone)#Gemological_characteristics

Always look for defects inside the company’s staff and directors. This is where due diligence plays a heavy part. If you find out that the “Chief Executive Inclusion” bankrupted three other companies in the past, look the other way. No matter how great an idea is, if the handlers have a bad luck streak with fraud and lawsuit, you might as well take your money to a parking lot and set fire to it, one bill at a time. Alternatively, you may discover that one or more of the executives had a big part in a company that was successful and is also tends to offer transparency to their shareholders. Where do I make the check out to? It’s this kind of track record that you’re looking for. Track records of success, not structural imperfections.

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One’s methods of determining if an investment is a winner might and should be different depending on your own personality. Using “Carat, Cut, Color, and Clarity” to judge a company’s “Idea, Execution, Design, and Team” is a great way to get you started. Recognize what you are good and apply your own methods of finding a “diamond in the rough” in the world of serious investing and begin building your financial portfolio. It’s definitely worked for Gary Kessler, and it could work for you.