I worked on my research for about 2 years and recently submitted a paper to a reputed conference. The referee reports came back and one of the referees pointed out papers that I should have encountered in my literature review but didn't. The knowledge of these papers completely changes the way I view my own work now. Is this normal? I feel stupid for having worked on a problem for 2 years and having missed 2-3 papers that would have been very important.
It's unfortunate when a referee points out crucial papers you missed in your literature search, and hopefully it won't happen too often. (The more you talk with other researchers, the more chances you have to learn about these papers earlier in the process.) However, it's certainly not abnormal. Nobody can be an expert in everything, some references are really not easy to find, and sometimes you just miss something for unclear reasons. If you publish enough papers, it's pretty much guaranteed that a referee will occasionally point out something you wish you had known about earlier. This is one of the advantages of peer review.
I have heard of a similar instance where the author had to completely change the focus of her study and rewrite a major part of her paper because the peer reviewers pointed out an existing paper with a very similar research question and results. While most authors would try to conduct an exhaustive literature search,it is not uncommon for them to miss out on one or two papers. Unfortunately, if the papers you have missed are ones that can change your view or approach completely, then your study might need some rework. This is not abnormal in any way, and might happen to anyone. It is indeed a good thing that the peer reviewers mentioned this, so you get a chance of revising your paper and making it more relevant.