Ever notice the seed in the outdoors area with the dog house? It's at the right side, near the graveyard and just underneath the balcony with Toad. This seed hides a secret that you can unlock right before facing the second boss. Once you have the ability to use the Water Element, water the seed. A plant will grow. Now enter the dog house (examine it with the Game Boy Horror) and defeat the second boss. Return to this area afterwards and water the plant again. Now continue with the game, but be sure to return after you defeat boss #3. Water the plant again and it will bloom and produce a precious diamond. Note that if you fail to return and water the plant after a boss fight, the plant will whither and die.