Warren Buffett is widely considered to be one of the greatest investors of all time, but if you were to ask him who he thinks is the greatest investor he would probably mention one man: his teacher, Benjamin Graham. Graham is an investor and investing mentor who is generally considered to be the father of security analysis and value investing. 

Principle No.1: Always Invest with a Margin of Safety

Margin of safety is the principle of buying a security at a significant discount to its intrinsic value, which is thought to not only provide high-return opportunities, but also to minimize the downside risk of an investment. In simple terms, the main goal should be to buy assets worth Re1 for Re 0.50.

 The business assets may have been valuable because of their stable earning power or simply because of their liquid cash value. Try to invest in stocks where the liquid assets on the balance sheet (net of all debt) were worth more than the total market cap of the company (also known as "net nets"). This means that one would be effectively buying businesses for nothing. While there are a number of other strategies, this is the typical investment strategy for safe investor.

This concept is very important for investors to note, as value investing can provide substantial profits once the market inevitably re-evaluates the stock and ups its price to fair value. It also provides protection on the downside if things don't work out as planned and the business falters. The safety net of buying an underlying business for much less than it is worth is the central theme of a successful investor. When chosen carefully, it is found that a further decline in these undervalued stocks occurred lesser number of times. 

Principle No.2: Expect Volatility and Profit from It

Investing in stocks means dealing with volatility. Instead of running for the exits during times of market stress, the smart investor greets downturns as chances to find great investments. Market offers investors a daily price quote at which he would either buy an investor out or sell his share of the business. Sometimes, he will be excited about the prospects for the business and quote a high price. At other times, he is depressed about the business's prospects and will quote a low price.

Because the stock market has these same emotions, the lesson here is that you shouldn't let Market's views dictate your own emotions, or worse, lead you in your investment decisions. Instead, you should form your own estimates of the business's value based on a sound and rational examination of the facts. Furthermore, you should only buy when the price offered makes sense and sell when the price becomes too high. Put another way, the market will fluctuate - sometimes wildly - but rather than fearing volatility, use it to your advantage to get bargains in the market or to sell out when your holdings become way overvalued.

Here are two strategies that can be used to reduce the negative effects of market volatility:

Rupee-Cost Averaging

Rupee-cost averaging is achieved by buying equal Rupee amounts of investments at regular intervals. It takes advantage of dips in the price and means that an investor doesn't have to be concerned about buying his or her entire position at the top of the market. Rupee-cost averaging is ideal for passive investors and eases them of the responsibility of choosing when and at what price to buy their positions.

Investing in Stocks and Bonds 

It is recommended that distributing one's portfolio evenly between stocks and bonds as a way to preserve capital in market downturns while still achieving growth of capital through bond income. Always remember, first and foremost priority should be given to preserve capital, and then to try to make it grow. Having 25-75% of your investments in bonds and varying this based on market conditions can be very helpful in achieving optimum growth. This strategy has the added advantage of keeping investors from boredom, which leads to the temptation to participate in unprofitable trading (i.e. speculating).

Principle No.3: Know What Kind of Investor You Are 

There are different types of investors based on their risk appetite, operating in the market.

Active vs. Passive

Active and passive investors can also be referred as "enterprising investors" and "defensive investors". 
You only have two real choices: The first is to make a serious commitment in time and energy to become a good investor who equates the quality and amount of hands-on research with the expected return. If this isn't your cup of tea, then be content to get a passive, and possibly lower, return but with much less time and work. Market psychology notion is of "risk = return", in fact it should be "Work = Return". The more work you put into your investments, the higher your return should be.    

If you have neither the time nor the inclination to do quality research on your investments, then investing in an index is a good alternative. A defensive investor can get an average return by simply buying the 30 stocks of the Sensex in equal amounts. Getting even an average return - for example, equaling the return of the Sensex - is more of an accomplishment than it might seem. The fallacy that many people buy into, is that if it's so easy to get an average return with little or no work (through indexing), then just a little more work can yield a higher return. The reality is that most people who try this end up doing much worse than average. 

In modern terms, the defensive investor would be an investor in index funds of stocks. In essence, they own the entire market, benefiting from the areas that perform the best without trying to predict those areas ahead of time. In doing so, an investor is virtually guaranteed the market's return and avoids doing worse than average by just letting the stock market's overall results dictate long-term returns. Beating the market is much easier said than done, and many investors still find they don't beat the market.

Speculator vs. Investor

Not all people in the stock market are investors. It is critical for people to determine whether they are investors or speculators. The difference is simple: an investor looks at a stock as part of a business and the stockholder as the owner of the business, while the speculator views himself as playing with expensive pieces of paper, with no intrinsic value. For the speculator, value is only determined by what someone will pay for the asset at any given point of time, but a speculator is a mere guesser.

Graham's basic ideas are timeless and essential for long-term success. He bought into the notion of buying stocks based on the underlying value of a business and turned it into a science at a time when almost all investors viewed stocks as speculative. Graham served as the first great teacher of the investment discipline, as evidenced by those in his intellectual bloodline who developed their own. If you want to improve your investing skills, it doesn't hurt to learn from the best; Graham continues to prove his worth in his disciples, such as Warren Buffett, who have made a habit of beating the market.