I have not heard this particular expression, but it appears to be using "water yourself down" and "100 proof" to mean dilute your personality is some way. For example, if you are excited about a hobby, it might mean to ACT less excited because that level of enthusiasm annoys the other person.

The "Water Down" and "100 proof" comes from the fact that liquor has its strength measured in "proof" as a percentage of alcohol.. 100 proof = 50% alcohol. The other part comes from dishonest bar owners adding water to their liquor to weaken it and make it last longer. If they replace 1/3 of 2 bottles with water, they now have 1 bottle of liquor to sell (much weaker than the label implies) for "free". So 2 bottles turn into 3. .

Hope this helps.

Other ways to say this:

Never compromise on your personality, just because someone cannot accept you as you are.

Be yourself - whatever others may think of you....

Patrick's explanation is a lot more thorough than I'm going to get, but I agree with him all the way.

Generally speaking, something 100 proof alcohol will be strong, possibly difficult to drink straight, burn going down, meant for the not so weak/inexperienced drinker.

Basically water it down and you are reducing those qualities all at once. Meaning you are making it easier to handle/drink.