The following is an interesting story about investing in gold and stocks and investment cycles.

There was once an investor named Daniel. He was born in 1903, and became an investor that same year when his parents bought him one share of the Dow. That same year the Dow bottomed out at a low of 30 points so his parents decided to purchase one share of the Dow using a $20 and $10 gold piece (1.5 ounces of gold).

By 1923 Daniel's shares had tripled in price over the preceding 20 years but then then the stock market really took off and by 1929 each share was worth 12 times what his parents had paid.

However, the year before Daniel got married to Dorothy. Then in the spring of 1929 Daniel and Dorothy had their daughter Diane.

But during this time Daniel was getting an uneasy feeling, figuring that the market couldn't go up forever. So, in the summer of 1929, he cashed out, receiving 18 ounces of gold, which he held in trust for Diane.

Just a few months later the Dow crashed, beginning The Great Depression, and 3 years after that the Dow bottomed at 40 points (2 ounces of gold). Daniel took the 18 ounces of gold he got from cashing out of the Dow in 1929, and bought 9 shares of the Dow for his daughter, Diane.

Diane's investment did very well over the next 30 years, but in 1966 her father, Daniel now 63 and retired, phoned her and shared a secret that he had learned over the years with her.

The secret was that valuations seem to swing back and forth like a great pendulum. He went on to explain to her what P/E ratios were, and how stocks were extremely overvalued at the time. He also had calculated that, measured in terms of gold, the Dow was 1 1/2 times more overvalued than it was at the peak at which he sold in 1929.

After getting off the phone with her father, Diane called her broker, and sold her 9 shares of the Dow. The next day she bought gold and was surprised to find that she could buy 252 ounces of gold with the proceeds.

In the late 1970s gold began to skyrocket in price (in part due to Nixon taking the U.S. off the gold standard in 1971) and by early 1980 everyone was talking about investing in gold.

Diane's father called her to discuss the gold mania and how it couldn't last. It reminded him of the stock frenzy of 1929. He also said that the P/Es were at the lowest they had ever been since 1932, and that stocks were extremely undervalued.

The very next day gold hit a record $850; Diane called her broker and told him to sell her gold and use the proceeds to buy shares of the Dow. Later that day, her broker called her back to inform her that not only was gold at $850 but the Dow was at 850 points that same day so her 252 ounces of gold could buy exactly 252 shares of the Dow.

Diane's father Daniel died in 1985. He was 82. Diane thought of her father and the lessons he had taught her often. In 1999, when her gardner told her she should invest in dot.com and tech stocks, she got an uneasy feeling. She thought about her father and decided it was time to investigate.

She looked up the P/E of the Dow and found that it was 30 percent higher than the stock market peak before the crash of 1929. Next she divided the points of the Dow by the price of gold and found, that in terms of gold, stocks were almost 2 1/2 times more overvalued than they were before the 1929 crash.

She went to her computer, logged onto her brokerage account, and sold the Dow. A few days later she took the proceeds and bought 11,088 ounces of gold.

With gold now over $1,000 today, that 11,088 ounces of gold is now worth over $11.8 million. Her grandfather's $30 investment had returned price gains of almost 37 million percent. That is an example of the power of understanding investment cycles and not following the herd.