Dig some joint compound out the bucket with a six-inch drywall knife. Only dig out enough joint compound so the edge of the knife is covered. It is easiest to work with a bead of joint compound on the edge of the knife that is no wider than 1 1/2 to 2 inches.
Smooth the joint compound over the affected area with the knife. Use long even strokes, holding the drywall knife at a forty five degree angle to the wall. Place the drywall knife against the wall at more of an angle to scrape off excess joint compound. The goal is to cover the water mark and make the joint compound as smooth as possible. Let the joint compound dry for 24 hours.
Sand the repaired area using a drywall sanding sponge. Lightly sand the area to remove rough sections and ridges. Do not sand too much joint compound off the wall or you may need to apply a second coat.
Paint the repaired area of the wall using a paint brush and paint that matches the rest of the wall.