From your response it’s clear that I didn’t do a good job explaining.
Another short-form attempt: The details matter, but the magnitudes aren’t that different. If you invest in a financial instrument, the people who sell it will hedge or redirect their funds into other instruments until it’s all diffused into various places, driving down remaining supply of available investment by the amount you invested. Now supply and demand must match, so price goes up to do that. If there’s lots of similar available investment opportunities this will mostly be more supply and the price won’t move much. If there’s no remaining places to invest, it will mostly raise prices and reduce demand, instead. If the additional value in the companies slash making the funds available to those companies doesn’t itself increase supply, a fair prior would be 50⁄50 here, so it’s somewhat more than that, plus in addition there’s the anticipation effect—you’ve made past returns look better and future returns look better as well, so investment is now more attractive. (Plus any acausal effects, if you think they count).
The price change being a ‘side effect’ isn’t quite right, it’s more like it’s an intermediate effect.
I hope that helped but I worry the best way to understand this is actually to just understand microeconomics, and that would require a full blogpost. Although I’m not convinced it requires two!
It sounds like you are responding to my first paragraph, in which case I agree with your criticism. I think my second paragraph is closer to the way I am thinking about things. For me the main question here is whether it matters what company you invest in, not whether the price change should be counted as a “side effect”.
From your response it’s clear that I didn’t do a good job explaining.
Another short-form attempt: The details matter, but the magnitudes aren’t that different. If you invest in a financial instrument, the people who sell it will hedge or redirect their funds into other instruments until it’s all diffused into various places, driving down remaining supply of available investment by the amount you invested. Now supply and demand must match, so price goes up to do that. If there’s lots of similar available investment opportunities this will mostly be more supply and the price won’t move much. If there’s no remaining places to invest, it will mostly raise prices and reduce demand, instead. If the additional value in the companies slash making the funds available to those companies doesn’t itself increase supply, a fair prior would be 50⁄50 here, so it’s somewhat more than that, plus in addition there’s the anticipation effect—you’ve made past returns look better and future returns look better as well, so investment is now more attractive. (Plus any acausal effects, if you think they count).
The price change being a ‘side effect’ isn’t quite right, it’s more like it’s an intermediate effect.
I hope that helped but I worry the best way to understand this is actually to just understand microeconomics, and that would require a full blogpost. Although I’m not convinced it requires two!
It sounds like you are responding to my first paragraph, in which case I agree with your criticism. I think my second paragraph is closer to the way I am thinking about things. For me the main question here is whether it matters what company you invest in, not whether the price change should be counted as a “side effect”.