A sequel to ‣
A market is made when two different models intersect on a single axis - price. Typically, a seller and a buyer will only agree on present price because they have different models that have assigned non-congruent probabilities to future outcomes. In the stock market, this is why the seller offloads their position at that price, and the buyer takes on the risk of ownership. Therefore the price of a security develops in relation to the number of incongruent models that are aligning at any point in time (reflected in trading volume). Price is therefore a function of the number of able actors, and the incongruency of their pricing. It is worth noting that the number of actors, a function of the availability of capital and opinion, will affect price just as much as the usefulness of their predictive models.
The stock market is a complex adaptive system because many of the predictive models are assigning probabilities to the future (but not present) movement of the predictive models of other actors, as well as the influx/outflux of actors. In that sense, every actor is themselves the input to another actor’s predictive model.
The long-term investor removes one element of risk by betting, not on the influx/outflux of able actors (short-term variations), nor on reactivity to novel news (also short-term variation), and therefore focuses only on areas where they believe that predictive models will eventually shift back to rational valuations.
Note: some people will explain trades as, “one person thinks the stock is going up, and the other thinks it is going down.” This is a very incomplete model, although it would be true is there were only one stock in the market. Since that is not the case, a trade means that the seller thinks there are better opportunities elsewhere, while the buyer thinks this opportunity is good enough.
[graph - several lines, some going up, others going down, in straight lines. One line is highlighted as the stock being traded. Title: Person A’s model of the future. Then another for person B.] Doesn’t matter if one is up and other is down, just that one is not the optimal one, and the other is (or at least above a threshold of “good”)