This is my sanding block for wet sanding lacquer:

It is approximately 1.5" x 1.5" square and .25" thick. Pretty standard cork board material. I wrap the paper around it and pinch it in the center to hold it around the block, like so:

I begin sanding with 1000 grit paper. I have tried starting with 600, but it can leave deep scratches that wont all sand out and you wont see them until you polish the guitar. You will then kick yourself. Ouch.
I sand an area about twice the size of the sanding block from top to bottom and across the guitar from the side to the center line, in a circular motion. I use a very light touch and I wipe off the surface frequently to check my progress. I will sand a small area dry if I have the whole section level except for a couple of wise ass low spots that refuse to level out.
When I am dry sanding, the lacquer will pill up under the paper and I wipe it off on the towel I have the box on. You will also need to wipe these pills off of the surface so you are not riding on them instead of actually sanding the guitar.
I switch to 1500 grit and do it all again. I stop at 1500 grit and check how well the lacquer will polish out. The compound I use states it will remove sanding scratches of 1200 grit paper, so if I have done my job properly, I will get a nice shine with the compound alone. The wax is the icing on the cake. I use the Wizard's wax and compound Ken Cierp recommends for lacquer. Other people have good success with other compounds and wax. It is up to you which products you wish to use. However, the Wizard's products smell like candy, so I am sticking with it because I do the compounding and waxing while sitting on my couch and the smell keeps my wife off my back while I am working!
I will attempt to make a video of how I sand but I usually need one hand to hold the box while I sand.
Questions? Comments? Let me have 'em!!
Thanks,
Tony