Insights and Strategies
No Pressure, No Diamonds
In the 1953 film Gentlemen Prefer Blondes, Marilyn Monroe sang it best, “….but square-cut or pear-shaped, these rocks don't lose their shape, diamonds are a girl’s best friend”. Since then, men and women alike have been splurging on jewellery with diamonds to celebrate everything from engagements and weddings to birthdays and so much more. However, while many appreciate the beauty of a flawless diamond, few truly understand the extreme pressures required to create such diamonds in nature. To keep it simple, diamonds are formed hundreds of miles below the earth’s surface in the mantle, where temperatures can reach as high as 3700° Celsius (or 6692° Fahrenheit). It is here where carbon atoms bond together to form crystals, which over the course of many hundreds and even thousands of years, grow into the transparent, beautiful diamonds which many of us gift to our loved ones each year. While these extreme pressures are absolutely necessary to create diamonds (which as a reminder, is the hardest natural material on earth), this process is quite similar to what is necessary when it comes to investing and especially as it relates to building diamond-like investment portfolios (i.e., high pressure + long-term time horizon). And while it may be difficult for many of us to see the bigger picture and maintain a long-term investment perspective given the volatile start to the year, which we acknowledge is especially difficult when the news flow is dominated by a long list of worrisome headlines (e.g., calls for an imminent recession/hard-landing, job losses, market collapse, etc.), we remind investors, that some of the most beautiful and flawless diamonds on earth were formed under very extreme pressures and over very long periods of time!
In comparison and as we demonstrate below, the S&P/TSX index over the very long-term (i.e., since the 1980s) has managed to generate returns of ~9.5% per year on average, despite facing many volatile/high pressure years since then.