Expansion & Protection

Although Commanders lean more on the conservative side, they do want growth and are willing to take on varying amounts of risk in order to get it. This is especially true when the pool in question represents dynastic wealth that will be passed on between generations. A Commander has an obligation to ensure that the pool is maintained and grown in an intelligent way so that it may persist beyond their lifetime.

Compounding this is the fact that safe assets, the ones that have the least amount of intrinsic risk, are both rare and expensive. If a family office simply puts its money into Treasury securities, for example, it will get negative returns even though those are by definition the safest assets on the market. They don't want their pool to shrink, so they have no choice but to look for better options that involve some amount of risk taking.

Contenders, on the other hand, are hungry for access and will use a wide range of different (sometimes unethical or illegal) strategies to get it. They understand that their opportunities come not from full-on assaults of the pools, but by slipping through the openings created when Commanders go looking for growth opportunities.

This is a dilemma for the Commanders. If all they want is safety and have a big enough pool, they may choose to do nothing. But that is rarely the case, especially when the pools in question have mandates that require regular investment. The Commanders therefore know they must put their capital to work without exposing the pool (or themselves) to undue risk.

Expansion Strategies

Commanders lean on two different types of strategies for expansion of their pools:

• Aggressive: Investing in new industries and acquiring smaller, first-mover entities in order to capture long-term competitive advantages in markets that Commanders are either unfamiliar with or have weak positions in.

• Defensive: The purchase of established, mature assets and consolidation of markets they already have a strong position in.

Rather than a simple binary choice, these two strategies form two ends of a spectrum that Commanders move within based on current conditions and their own objectives. Each strategy presents different risk profiles, with Commanders who tend to excel in one or the other.

Aggressive

Aggressive allocators represent the biggest opportunities for Contenders. Their goal is to persuade Commanders that they represent a high value investment which belongs in the Commander's portfolio. If the Commanders have a mandate to expand rapidly or feel a deep-seated psychological need to move fast, then there's an opening for a smart Contender to win the Valuation Game.

A recent example of an aggressive expansion is Tiger Global, a hedge/private equity/venture capital fund with $58 billion in AUM as of this writing. At the peak of the zero-interest rate era, they would invest in just about anything that looked like it could provide a future payoff. Their due diligence was such that they would write multi-million dollar checks after only a couple of interactions with the prospective company.

This made sense given the environment: when interest rates are that low, you have no reason not to just take lots of swings. Even if most fail, one big winner can pay for all the losers. Many other Commanders at the time followed the same strategy. By operating this way, they put their hands into many different markets and diversifying their investments to a bewildering degree.

Defensive

Defensive strategies focus on expanding existing assets through consolidation of their existing position in a market. Rather than speculate on potential, they focus instead on proven winners and then consume them for the sake of moat creation.

This way of doing business is expensive: proven winners don't come cheap, at least not if the sellers know what they have on their hands. It's a slower, more plodding approach that leaves less wiggle room for speculation, but the long-term benefits tend to be stronger. Rather than hoping for one winner out of a pack of losers, Commanders who favor defensive strategies stack advantages in order to win on a regular basis.

The stereotypical defensive example is Koch Industries. Their business is massive: annual revenues exceed those of Facebook, Goldman Sachs and US Steel—combined. It got that large through methodical acquisitions of assets within the oil and gas industry. These assets fit a :

Koch Industries expands, almost exclusively, into businesses that are uncompetitive, dominated by monopolistic firms, and deeply intertwined with government subsidies and regulation.

In other words, Koch Industries doesn't speculate—their investments are designed to help them win from day one. This is not a strategy everyone can pursue, since by default it requires a certain amount of capital and a position within specific types of industries. But it represents an ideal version of the defensive expansion, one that most Commanders dream about.

The Need for Protection

At the core of all Valuation Games is the tension between the Commander's dual need to expand and secure their pool and desire of both Contenders and other Commanders to gain access to it.

The most significant threat to Commanders comes from the manipulation of valuations. In the hands of skilled players, valuation becomes a powerful tool to undermine a Commander’s position, either by inflating the worth of a contender's assets or by devaluing the Commander's own resources.

Commanders must be alert to these manipulations and adopt protective strategies to ensure they don't get taken advantage of when they invest. They need to be vigilant against the strategies of Contenders, who are adept at exploiting openings for quick gains, and other Commanders, who might be plotting to undermine their position or seize parts of their pool.

Contender Dangers

Contenders have straightforward motivations: to move up in the world and become Commanders. How they behave is driven by this desire, and as a result it doesn't take a rocket scientist to understand much of they "why" behind what Contenders do.

For them, Valuation Games can be life-or-death. A single deal can be the difference between riches or ruin. That means, despite the simplicity of their motivations, their methods have a wide range of possibilities. They are forced into positions that require creativity and their willingness to do whatever it takes to win is often fed by desperation.

A desperate Contender is dangerous to whoever they deal with. They may commit fraud, make decisions to maximize short-term benefits for themselves, and otherwise act in a zero-sum fashion at the expense of the Commanders they deal with.

Most intelligent Contenders also recognize the power asymmetry they face in any transaction with a Commander. In many cases there are opportunities for the Commander to take advantage of their weakness and give them a bad deal, which could be ruinous for the Contender. As a result, they have an imperative to protect themselves from the predations of unscrupulous Commanders by any means necessary.

The asymmetry is similar to an idea from evolutionary biology called the life-dinner principle:

If a predator fails to catch its prey, it loses its dinner, while if it succeeds, the prey loses its life.

In other words, the prey is far more motivated to escape than the predator is to catch them. A missed meal isn't good, but dying is far worse. In the Valuation Games context, weaker Contenders are similar to the highly-motivated prey: losing isn't always an option. Meanwhile, the Commander may want to win the game, but at the end of the day losing a deal is rarely a serious problem for them.

Commander Dangers

Motivations for Commanders are more complex. They don't live with the desperation of Contenders, and in many cases they don't need to do anything except avoid making a big mistake. Yet are Commanders are human, often very competitive ones at that.

To start with, Commanders often compete with and prey on each other. An asymmetric Valuation Game with a Contender is easy for a Commander to win: transact or walk away. Commanders protect themselves against the Valuation Game strategies of Contenders primarily through conservative decision-making and diversification. They'd rather miss out on a good deal than scandalize their reputation, and when they do take risks they don't allocate too much of their portfolio to ensure any backfires aren't fatal.

But when two Commanders lock horns, things change. These Valuation Games are where the real poker begins. Commanders use their resources to undermine each other, using manipulation of media, political subterfuge, and outright espionage to win. Each move is designed to either raise or diminish the value of a Commander and their pool at the expense of their opponent.

The scale of these moves means that holes in valuation can have effects that cascade throughout a market. Short-seller hedge funds are a prime financial representation: they are substantial pools on their own, and they specialize in punching holes in the valuations of much larger, publicly-traded pools of capital. When they succeed, value can vanish into thin air as the target firm collapses and everyone involved loses their livelihood (and in some cases, their freedom).

Consider the example of Hindenburg Research, a short seller fund that targeted the electric truck maker Nikola Motors. After some initial digging, it became clear to founder Nate Anderson that Nikola was a full-blown fraud. They released a report in 2020 which kicked off a process that led to the eventual dissolution of Nikola and the imprisonment of founder Trevor Milton.

Trevor Milton was the classic example of a savvy, unethical Contender turned powerful Commander: he created the company almost entirely out of thin air. The Valuation Games he played made him a billionaire on paper, and he likely would have gotten away with it for even longer if Hindenburg had not taken a position against them. This is the effect that large-scale Commander vs Commander Valuation Games can have on entire markets.