"We have two classes of forecasters: Those who don’t know, and those who don’t know they don’t know."
-- John Kenneth Galbraith

For investors, realizing the limits of your knowledge is just as important as expanding your understanding. No matter how hard you try, you can't know everything -- and completely unanticipated surprises can often cause the most damage to your investments.

Know what you know
Superinvestor Warren Buffett is famous for sticking within his circle of competence, and avoiding what he doesn't understand. When tech stocks were soaring in the late l990s, he was criticized for not buying Microsoft (Nasdaq: MSFT), even though the company seemed like a no-brainer success story. In 1998, Buffett explained, "I don't know what that [computer-related] world will look like in 10 years, and I don't want to play in a game where the other guy has an advantage over me."

As it turns out, Microsoft's stock has averaged just a 1% annual gain since 1998. Few observers back then expected Mr. Softy to be late to the online party. Rivals like Google (Nasdaq: GOOG) in online search and Apple (Nasdaq: AAPL) in portable media players have eaten Microsoft's lunch, while Apple's operating system gains ground against Microsoft's Windows. Even Microsoft's Internet Explorer browser has been losing market share to competitors like Google's Chrome, although it's still dominant in its category. Some see Microsoft as a bargain today, but they may end up suffering if yet more surprises lurk in the future.

Similarly, pharmaceutical Dendreon (Nasdaq: DNDN) and its pipeline of cancer-fighting drugs might seem like an irresistible buy to new investors. But savvier Fools know that getting such drugs approved by the FDA is a long, difficult, and perilous process. Drugs still in development are not sure things, which is why many investors seek drug companies with deep pipelines full of many possible home runs. Dendreon's Provenge recently did get FDA clearance to fight prostate cancer, but investors still can't rest easy; Medicare is taking a year to decide whether it will cover the $93,000 treatments.

As you invest, try to remember that there are some dangers you'll never see coming. Sticking with business you know inside and out could help you skate by with fewer nasty surprises.

What have you now known that you didn't know, and how did that hurt you? Let us know -- leave a comment below.