Investment Risk: What Diamonds and AI Teach Investors

By Justin May, Portfolio Manager

I remember vividly saving for an engagement ring in college. The goal was $10,000 total: $7,000 budgeted for the diamond itself, and $3,000 for the setting. It took a lot of work, but eventually I met that goal and the rest is history.

Today, I could buy a better diamond, grown in a lab, for less than $500.

Lab-grown diamonds have flooded the market in recent years. They are the exact same thing as ‘natural’ mined diamonds, except they’re mass-produced for cheap. This modern alchemy has upended the market for natural diamonds. The choice between expensive, controversial natural diamonds or cheap lab diamonds seems to be an easy one – over 60% of engagement rings sold today use lab diamonds, and prices for natural diamonds today are less than half of 2021 prices.

21^st-century alchemy isn’t limited to diamonds. In the same way that lab-grown diamonds have undercut the diamond market, AI automation threatens to undercut many tech businesses. Adobe, which makes Photoshop, is under pressure as AI image generation and design creates cheap competition. AI can help automate taxes and bookkeeping, meaning demand for Intuit’s QuickBooks and TurboTax may fall. Anecdotally, I used to make graphs like the one below in half an hour using software; AI generated this graph in under a minute.

Chart comparing five-year changes in natural diamond prices with Adobe and Intuit stock returns

Why does this matter for investors? A diamond was never valuable because of its function; it was valuable because it was rare, or at least because people believed it was. Once labs could make the same stone for a fraction of the cost, that belief fell apart, and so did the price.

Stock prices can also be affected by a cheap substitute. Intuit and Adobe were seen as safe investments, with loyal customers, hard-to-replace products, and high margins. Then AI made their future cash flows look less certain, and investors lowered what they were willing to pay. A few lessons for investors:

Price matters. Intuit and Adobe are still profitable businesses. What changed is what investors expect them to earn in the future. When a stock's price assumes years of strong growth, it takes very little bad news to cause a drop. Paying reasonable prices relative to what companies earn leaves room for surprises.
No company is safe, and the market moves fast. In 2021, few people expected AI to threaten software companies. If they had, the stocks would have already fallen. By the time a disruption makes headlines, it's already reflected in the price. The next disruption probably won't be one we see coming either.
Diversification protects you from surprises. If Intuit or Adobe made up a big part of your portfolio in 2021, the past five years would have been painful. That's especially true if you own a lot of your employer's stock. Spread across thousands of companies, one company's decline is a small setback.

I don’t regret buying my wife’s ring, but it’s been a terrible investment. Like a stock, its value depended on a future nobody could predict. That's exactly why we don't try to.

Sources: Stock returns are total returns based on adjusted closing prices from Yahoo Finance, September 29, 2021 to September 28, 2026. Natural diamond prices are from the Rapaport 1-carat price index via CNBC, September 2021 to September 2026. Lab-grown diamond market share is from The Knot 2026 Real Weddings Study.