Answer:
Hamlet's opinion about theatre is that the latter should stand as a reflection of reality ("...as 'twere, the mirror up to nature"), therefore actors shouldn't exaggerate but rather act naturally ("...with this special observance, that you overstep not the modesty of nature") . In other words, theatre is a place where a reflection of what happens in real life can be seen, and the audience that enjoys theatre likes to see actors that perform naturally. Hamlet criticizes actors that exaggerate ("...let your own discretion be your tutor") because that kind of performance distorts what happens in reality.