As for [the simile] "Like the moon [reflected] in the water", the moon actually resides in space whereas its reflection appears in the water. The moon of the mark of actual Dharma resides in the empty space of the reality limit and the nature of the dharma of suchness; however, in the water of the minds of the common gods and men, there appears the mark of a self and that which belongs to a self. Because of this, they are referred to as being like the moon [reflected] in the water.
Then again, this situation is like that of a small child who sees the moon in the water, is delighted thereby, and then desires to seize hold of it. Adults observe this and then laugh. People who are lacking in wisdom are just like this. On account of entertaining the view of the body [as the basis of individuality], they [erroneously] discern the existence of a self. Because they are lacking in actual wisdom, they perceive all manner of dharmas and having perceived them, they take delight in them and desire to grasp at the various characteristics: the characteristics of manhood, the characteristics of womanhood, and so forth. But the sages who have gained the Way laugh at this. This is as described in a verse:
Just like the moon in water or the waters of a mirage,
Obtaining wealth within a dream, seeking life in the midst of death.
So there are men who truly do aspire herein for gains.
Delusions of such people do bring forth the sage's smile.
Furthermore, just as when one sees the reflection of the moon in still water, but, when that water is roiled, one no longer sees it, so too, though one may view the reflection of a self, arrogance and the fetters in the stagnant water of ignorance-laden thought, if one roils those mental waters with the staff of actual wisdom, one no longer sees reflections of a self and other such fetters. It is on account of this that it states here that the Bodhisattvas are aware of all dharmas as being like the moon reflected in the water.