What does this saying mean You don't know the difference between your arse and a hole in the ground?

It means you don't know what your talking about, or perhaps more directly, you have little or no intelligence at all, since the difference between the two openings should be obvious to anyone with even a very modest endowment of intelligence. When it was first used, this famous insult must have had quite a punch. It has since become trite. For people who enjoy dominating conversations by bullying, this kind of comment is stock in trade.