Right. Nitro is generally pretty brittle stuff, while wood isn't. Get the wood wet and it expands while the finish doesn't. Creates cracks. The wood will dry out so it's not the end of the world - it's not going to rot or anything - but you may end up with the results you're getting.
Personally, I do very little to prevent it. First, as Bagman suggested, don't try to hide the holes. Paint the little rascals. Second, don't go batshit with the water when wet sanding. Some guys use a spray bottle to just moisten the surface, others just soak the sandpaper and let it drip for a bit before using it. You don't need to get things really wet. You're basically just trying to keep the paper from loading up and causing scuffs.