The Manchester City boss was left frustrated after the talent decided to quit the Etihad for the Bernabeu for a fee that could rise to £22million.
Diaz, whose contract was expiring in six months time, barely got a look-in under Guardiola making just 15 first-team appearances.
He follows in the footsteps of Jadon Sancho who has starred for Borussia Dortmund since quitting City in 2017.
City's latest talent coming through the ranks in Phil Foden has also yet to make a league start.
And when quizzed how managers could help develop their young players and give them more game time in the future, Pep responded: "Create a good second league,
"Create a good second team and you will see how many young players will be in the Premier League.
"Play against real teams. Against guys who are 24, 25, 26, 27 years old. Compete really every, every, every single weekend with real games. Fighting for survival or to be relegated, create that.
"And after, maybe the managers in the Premier League will have more courage to put them [in the team]. But they don't, they play every weekend friendly games."
The EFL Trophy was designed for Premier League and Championship youth sides to compete in matches against lower league opposition.
But Guardiola insists it is not the way to go.
He added: "Where they don't play in front of 10 people or 12 people here in the second team.
"They don't compete really and that's why sometimes it's difficult to put them [in the team]… that's why they train with us, sometimes they play in the cup, sometimes go on loan, to see how they develop in that position.
"And after they come back and at the end it is not about being generous or more kind, they have to show on the grass, on the pitch. I speak [about this] many times, on the pitch it speaks for itself."
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