Question

When I hold down mouse-1 and move it around in a buffer, I just want the cursor to follow the mouse.

Answer 1

To answer the original question:

  (defun my-move-cursor (event)
  (interactive "e")
  (mouse-set-point event)
  (let (event ov)
    (track-mouse
      (while (progn
               (setq event (read-event))
               (or (mouse-movement-p event)
                   (memq (car-safe event) '(switch-frame select-window))))
        (mouse-set-point event)
        (if ov (move-overlay ov (point)  (1+ (point)))
          (setq ov (make-overlay (point) (1+ (point))))
          (overlay-put ov 'face 'match))))
    (when ov (delete-overlay ov))))

What I ended up doing was a bit different. I modified the normal function so it does not enable transient-mark-mode, and made a constant overlay which highlights the character that the mouse is on.