Most people line on top of their lash line so when you look down, you can see where they've applied the kohl. This technique is a slightly more subtle version -- it also helps those with limited lid space to conserve room for more eye shadow, since you won't be able to see the eyeliner on top of your lid when you close your eyes. [See Image #3]
In the photos above, you can see the immense difference it makes on Tod -- I used a black pencil for the purposes of this tutorial, but you could easily attempt this with a brown pencil for a slightly more natural look.
In terms of product textures, I prefer a pencil for this step, but I've also played with gel liners -- liquid tends to look too harsh and you end up drawing a thick line to connect the tiny dots you create at the base of your lashes. It's beyond my capability.
How-to: Tightline your Waterline
Step 1: Pull up your eyelid to expose the waterline
Step 2: Apply the eyeliner along the base of the lashes. It doesn't have to be a perfect line; in fact, a series of dashes along the base of the lash will look more or less the same - no need to be neat!