The Art of Being Wrong: Investing with Humility

The Inevitability of Error

An interesting analogy may be the legendary tennis career of Roger Federer. As he pointed out in his 2024 Commencement address at Dartmouth College, while he won 80% of his matches over his career, he won only 54% of the points. He was “wrong” 46% of the time. In the investment realm, unforeseen and unintended consequences continually subvert even the most careful analysis.

Having the humility to understand that fundamental truth is what separates the survivors from those investors who are a flash in the pan. One must never forget Mark Twain’s timeless observation: “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

Surprises from the 2025 Trade War

The year just ended – 2025 – provided remarkable opportunities for being wrong. It’s a good laboratory in which to think about the art of being wrong. The year started with most economists and investors being wrong about how serious President Trump was about launching an all-out trade war against the world. He talked frequently on the campaign trail about the power and the beauty of tariffs, but he still took most of us by surprise on “Liberation Day” when he announced tariffs on goods imported to the U.S. at levels that had not been seen in a century.

So far, we’ve also been wrong about the impact that these tariffs would have on the economy and markets. Tariffs are, by definition, a tax on consumption. Most economists (and Nexus) believed they would lead to a spike in inflation in the U.S. Surprisingly, however, this has not happened. The U.S. inflation report for December showed headline inflation of 2.7% year-over-year and core inflation of 2.6%. A year ago, core inflation was 3.2%. Inflation may still be too high, but it is lower than it was a year ago.^[1]

Why Tariffs Defied Conventional Wisdom

Why were we so wrong? While we often remain perplexed by our faulty assumptions, on this occasion, a couple recent studies have revealed the error in our beliefs. Economists at the Federal Reserve Bank of San Francisco combed through U.S. economic data from 1886 to 2017. In a similar study, Northwestern University economists looked at data from 1840 through 2024.^[2] Both studies concluded that tariffs resulted in little to no inflationary pressure. What tariffs did do was to create economic uncertainty that weighed on businesses and consumers, and typically led to rising unemployment. The upward price pressure from adding taxes to imported goods was roughly offset by economic weakness that undermined demand. We were right to think that tariffs would be bad for the economy, but not for the reason we expected.

In hindsight, certain data in 2025 seem consistent with the observations in the San Francisco Fed and Northwestern University studies. Inflation in the U.S. was surprisingly mild. At the same time, the labour market was surprisingly weak. Since the “Liberation Day” tariff announcements in early April, the U.S. created almost no jobs outside of the healthcare sector. The manufacturing sector, which tariffs purport to help, lost jobs at an accelerated rate.

A Blow to Confidence

A growing body of economic research has concluded what many believed from the outset – that Americans, not foreigners, are bearing the cost of tariffs. We were actually right about this one! A German think tank called the Kiel Institute looked at U.S. data for $4 trillion of transactions in the last couple years. It determined that American businesses and consumers were paying 96% of the tariff cost.^[3] Other studies by the New York Fed, the U.S. Congressional Budget Office, and the Yale Budget Lab all corroborate this conclusion.^[4] This, together with the weak U.S. labour market, makes it not terribly surprising that consumer confidence in the U.S. is at historically low levels. While the University of Michigan Consumer Confidence survey is off its recent low, it remains 25% below where it was before “Liberation Day” and lower than it was during the Global Financial Crisis.^[5]

Surprising Resilience Among Trading Partners

Most of us also believed there would be a number of other “obvious” consequences from the trade war. For example, Canada’s economy depends on foreign trade and trade with the U.S. represents more than two-thirds of our exports. Surely, many of us thought, our economy and stock market would be devastated. As it turned out, we were wrong about that too. Our stock market soundly outperformed that of our southern neighbour. In Canadian dollar terms, the total return on the TSX Composite was 32.7% in 2025, compared to 12.2% in the U.S. While our economy definitely slowed during 2025, economic growth stayed positive. Our labour market was also stronger than in the U.S., particularly in the last four months of the year.^[6]

We thought that China, the target of the most aggressive U.S. tariffs, would surely suffer even worse than Canada. Yet exports from China flourished in 2025 and it recorded a $1.2 trillion trade surplus, the largest ever recorded by any country.^[7] It simply found other places to sell its goods. Overall, global growth looks like it will be 3.3% for 2025, precisely the same as it was in 2024. Go figure.

The Secret Weapons: Time Horizon, Diversification, and Discipline

At this point, readers probably wonder how we go about investing client money with any confidence if we know that we will be wrong a lot of the time. Moreover, we never know when we will be wrong or what we will be wrong about! Of course, that’s the real point of this essay and it’s a theme that we have written about before. The “art” is to invest with a view of what could happen, not based on a forecast of what will happen.

The secret weapons for success that we employ are threefold: time horizon, diversification, and discipline. It is not nearly so difficult to imagine what will happen over the next 10 years as it is to predict what will happen over the next 10 weeks. We apply almost all of our energy to thinking about the long term. We diversify in a thoughtful way. We’re confident in the long-term prospects for all of our investments, but we are pretty sure that we will be surprised about what does best in the short term. Perhaps most important is being disciplined about the price we will pay. This provides a margin of safety around our investment decisions and protects us from the times we are wrong. Taking a long-term approach, having investments across a variety of sectors and several countries, and investing with a margin of safety obviates the need to be “right” all the time. In fact, that’s the art of being wrong.