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BlackRock (NYSE: BLK) is reportedly in the market to raise a $10 billion private equity fund, pitching it with marketing materials that compare the strategy to Berkshire Hathaway's (NYSE: BRK-A)(NYSE: BRK-B) long-term, buy-and-hold investment philosophy, according to the Wall Street Journal. It's quite the comparison for a fund that hasn't even collected checks from investors, but people are actually running with it!
Bloomberg reported on the story by writing that "similar to the approach of Berkshire Hathaway Inc., BlackRock would look to hold on to its stakes for a long time." Money really can't buy that kind of positive press.
Of course, BlackRock's fund isn't Berkshire, really. It's just duplicating a piece of the Berkshire puzzle by taking a long-term approach in which it will buy stakes in private companies with the aim of holding them for 10 years, perhaps longer. That's kind of like Berkshire, but it copies what's arguably the least important piece of the Berkshire Hathaway story.
What made Berkshire
At the risk of stating the obvious, buying businesses in whole or in part, and holding onto those stakes for a long time doesn't guarantee that you'll outperform. The buy-and-hold part is just what Berkshire is known for, not what makes it great.
Image source: The Motley Fool.
Berkshire, as we know it today, is the result of three things that are almost impossible for any one company to do:
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Embracing a long-term, buy-and-hold philosophy.
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Owning growing insurance companies that reliably generate underwriting profits.
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Hiring a world-class portfolio manager who'll work for $100,000 per year.
You need all three of these things together to create another Berkshire. It's not sufficient to have just two out of three. It's all or nothing, as we've seen time and time again through a long list of Berkshire copycats that have copied everything but its performance.
Creating the next Berkshire
Taking the long view is the easiest way to replicate part of Berkshire's model. Buying stakes in private businesses and holding them for a long time is relatively trivial -- anyone can do it, but not everyone can do it well. Unlike stocks, private companies are actually pretty hard to sell. You may find that you hold for the long term because you simply couldn't sell even if you wanted to.
But some have also tried, and largely failed, to duplicate Berkshire's insurance component. Look to Greenlight Capital Re as a pertinent example. It's basically a David Einhorn-managed hedge fund that also deals in reinsurance on the side. Greenlight Re shares have basically gone nowhere in the last 10 years, thanks to a combination of less-than-stellar underwriting and the poor investment performance of Einhorn's long-short strategies in recent years.