One thing I have noticed repeatedly over the years about successful investors is that they have a clear sense of their goals and how they are going to reach those goals. But investors who are confused about what they are doing experience stress, uncertainty and emotional strains that sometimes lead them into decisions that are, at best, unproductive-and often disastrous.

One dictionary definition of investing is the act of committing money or effort in order to gain future profit or interest. That's a good start, but it's so broad that it covers just about anything you could do with money, including the purchase of lottery tickets (which I would classify as gambling rather than investing). When most of us use the word investing, we think of making a long-term commitment in order to achieve a long-term gain. That's different from speculating, which implies short-term commitment for short-term gain.

To use an example from my home town of Seattle, if tomorrow morning you call your broker and buy 200 shares of stock in Boeing because you believe it will go up $4 or $5 a share next week when profits or new airline orders are announced, you are speculating. But what if you call your broker tomorrow and buy 200 shares of Boeing stock because you believe the company's management and products will outperform those of the competition over the next decade? In that case, you are clearly an investor. Notice that the action is exactly the same: buying 200 shares of Boeing stock. But the dynamics of the transactions are entirely different. These two buyers have different goals, different expectations, different tolerance for stock volatility and different levels of interest in what the company is or is not doing.

Now let's suppose a third person calls a broker tomorrow and buys 200 shares of Boeing because he notices the stock is rising and he intends to stick with it as long as the upward movement continues. But he also plans to dump the stock as soon as it starts going down, and maybe he'll get back in later when Boeing stock is in an uptrend again. Would you call this third buyer a speculator? I wouldn't. I'd call this a case of an investor using a strategy akin to market timing.

IS MARKET TIMING AN INVESTMENT?

Some people think market timers are speculators instead of investors, and in a way they are right. If being a long-term investor means committing money to a particular fund or stock and leaving it there through thick and thin, then market timers don't fit the definition. Most of us think of investing as acquiring a stake in the future of something, whether it's a company, a mutual fund or an economy like that of the United States.

If that is your picture of an investor, then buying something on Monday and selling it on Friday creates some understandable confusion. Buying a stock or a fund with the intention of keeping it for the long haul regardless of the ups and downs along the way is a relatively passive approach. Once your decision is made, there's not much left to do.

But when you start timing the markets, you are not passive at all. You might buy a fund one week and sell it the next, only to buy it back two weeks later. You may have made a long-term commitment to invest in the U.S. equity market, but if your plan includes timing to enhance your returns and protect yourself from losses, your actions may not look or feel much like those of a long-term investor. Personally, I think investing with market timing is quite a bit like running a business.

A TALE OF TWO BROTHERS

Imagine two brothers who each inherit $400,000 on the same day. The first brother has a passion for art. He has carefully studied the art market and thinks he has a good eye for choosing pieces that will eventually become much more valuable as their attributes are recognized. One by one, this brother acquires such pieces of art, intending to hold onto them for as long as necessary to achieve what he sees as their true potential value. This behavior could certainly be called investing, and it is similar to a real buy-and-hold strategy.

Now imagine the second brother using his $400,000 to buy new inventory for his clothing store. (You could think of this brother having the last name Nordstrom if you like!) Brother #2 buys pants and shirts and shoes, as an investment according to our dictionary definition, but intending to mark them up and sell them for quick profits. If some of the merchandise doesn't sell, what will he do? Will he put those unsold shoes and pants into a warehouse hoping that someday they will become fashionable? No, at least not if he's a good enough businessman to be worthy of the name Nordstrom! He'll mark those goods down and move them out one way or another to make room for something new.

These two brothers could both be called investors. Each has committed money to something he believes he can sell at a higher price. Each (we shall assume) has made his decisions wisely, not recklessly. But the two brothers will have very different concerns and needs as investors.

The brother who bought pieces of art does not need to be concerned about day-by-day fluctuations in the art market. He may watch the trends and keep up on what buyers and sellers are doing. He will probably watch for news of sales or releases of other works by the artists whose pieces he has purchased. But he does not need to receive this news every day or even every week and certainly not every hour. This brother's concerns will be more long-term in nature. For instance, he will want to make certain his works of art are properly stored and insured. And he will want to monitor and perhaps even nurture the reputations of the artists whose works he owns.

The brother who runs a store, on the other hand, is affected by the market and the competition every day. If the store down the street puts the same (or very similar) clothing on special, he needs to know about it immediately. If sales of these styles suddenly go up or down, he will need to react very quickly to maximize his profits and avoid being stuck with racks filled with yesterday's fashions or to avoid running out of hot-selling merchandise just when demand reaches a fever pitch. So this brother's need for information is much different.

The brothers' different needs mean they can tolerate different mistakes. The art collector cannot afford to make many mistakes in choosing his collection. If he buys 50 or 60 pieces over a long period of time, each one carries a relatively heavy burden of the weight of his whole portfolio. However, once his major concerns such as storage and insurance are addressed, he can afford to neglect his investments for awhile because he is not relying on daily or weekly market activity. The store owner can afford to make a few more mistakes in selecting and pricing his merchandise, because his inventory will turn over (he hopes) rapidly and clothing can always be marked down for quick liquidation. However, he cannot afford any lapse in his knowledge of what his competitors, customers and suppliers are doing. He needs information on a daily basis and sometimes even more often than that.

BACK TO INVESTING

I think there's a strong parallel here with investing. In many ways, true buy-and-hold investors are like the art collector. They spend a lot of time choosing what they will own, and they stick with their choices through thick and thin. They cannot afford to make many mistakes in selection. But if they choose well, give their investments lots of time and don't let interim market fluctuations pressure them into abandoning their plans, they have a high probability of eventual success. While they would be wise to keep an eye on their investments, they do not need to check the prices every day or even every week. Ideally, they combine thoughtful and careful selection with patience and a long-term view that is at least somewhat immune to the emotional swings of the market. In some ways, they could be called agrarian, with the attitudes of farmers who plant carefully, tend their crops and wait for the harvest.

Market timers, on the other hand, are more like the store owner who buys 1,000 pairs of pants and hopes to turn them over quickly to eager customers. These investors have to watch the market daily (some watch it by the minute, but our systems, thank goodness, require pricing information only once a day). They must be nimble and quick, without any emotional attachment to the buying decisions they have made. Like the store owner, they must be willing to part with those pants instantly or to buy more, depending on the dictates of the market. Investors who use market timing, in other words, are in the business of actively buying and selling assets as market conditions change.

WHY THIS MATTERS

This difference is important because which camp you are in determines what you need to worry about and what you don't. The store owner would be foolish to worry about whether the pants and shirts in his inventory will deteriorate in quality if left in his unheated warehouse for 10 years. However, that would be a vital concern to an art collector. Likewise, the art collector would be wasting his time following every daily blip in the prices collectors are paying for art; if he has chosen well, he can be confident that the pieces he owns will eventually be worth substantially more than he paid for them. He will make relatively few decisions, but each one will be extremely important.

If you're an investor, you'll be much more likely to succeed if you know which camp you are in. If you're a buy-and-hold type, you'll attach much less urgency to the information you get and the decisions you make. You won't worry much about every economic or market forecast. And you'll be able to ignore the inordinate attention that the media pays to the Dow Jones Industrial average. But if you're a market timer, you'll know that every day your portfolio is on the line, and you'll be ready to either sell out or buy more. You will make lots of decisions, and make them often. You will know in advance that many of your decisions will probably turn out to be the wrong decisions; but you are confident that you'll be able to recover from your mistakes and that your good decisions will overcome your bad ones.

IS MARKET TIMING MORAL?

If you are a buy-and-hold investor, you may believe you are investing in a company or a national or regional economy, expressing your confidence in it while you help it grow. Even though that is rarely the case, the thought is satisfying to many investors who feel they are achieving some moral high ground by "investing in America," helping create jobs or loyally "rewarding a company" for its products, service or environmental practices.

But market timers can't afford any such thoughts of loyalty. They can't afford to care about the underlying businesses they own. They believe there are periods when the markets advance and other periods when the markets decline-and their job is simply to find ways to exploit those periods at the expense of other investors who are less astute.

I have seen many investors try market timing only to find they dislike the stress of a daily discipline. While a buy-and-hold investor makes few decisions, the market timer makes a new decision every day to either get in or get out. Even what looks like no decision at all-doing nothing-is really a decision to stay in or stay out.

I have seen just as many people who think they are buy-and-hold investors make buying and selling decisions at market extremes. They often buy near market peaks and sell at or near the market bottoms. The former activity is driven by greed, the latter by fear. Both of those emotions have their place...but they usually lead investors in exactly the wrong direction. You can watch for the signs of a frantic market when supposedly long-term investors start paying a lot of attention to daily activity.

DO YOU HEAR A SIGNAL, OR JUST NOISE?

Every day, an enormous amount of information and data is available to us, each piece seeming to scream for our attention. But one person can absorb only so much and we have to screen much of it before we can even process it. If you know what "business" you are in as an investor, it's not hard to figure out what to pay attention to and what to filter out as "noise." But if you're confused about what you have undertaken, you'll have trouble distinguishing the signal from the noise.

If you are a long-term investor with a buy-and-hold approach, the daily headlines and the hourly fluctuations in the markets are primarily noise that you should filter out. You can and should keep your eyes and ears open, of course, because when your money is invested you can't afford to completely neglect it. But for you, the really important "signals" are longer-term trends in the economy, society and the industries or companies in which you have invested.

But if you are a market timer, you must keep your ear to the ground every day. The longer-term trends may be interesting, but they will rarely have an impact on your investment decisions. For you, the very long-term trends in the economy are mostly noise, and you can safely pay little attention to them. For you, the "signal" to watch for is daily activity, especially daily changes in prices of securities and funds.

I am convinced that one reason so many people fail at being market timers is that they don't have the temperament for it, and they don't understand that they are engaged in an active business of buying and selling goods. And I'm equally convinced that many people fail at buy-and-hold investing because they don't understand it. They try to time their investments using emotions and hunches and tips, instead of simply doing what a buy-and-hold investor should do: buy and hold.

KNOW THE RULES

The rules for these two kinds of investing are quite different. If you get confused and try to play by two sets of rules, you're likely to find that investing is a hard, confusing-and often unprofitable-occupation. But if you know what you're doing and keep the rules straight, you're likely to succeed, whichever path you take. And you'll sleep better too, knowing how to deal with the barrage of information, choices and advice you face constantly.