fast grower or low p/e?

In seeming contradiction to some of the "value vs. growth" studies noted elsewhere here, Peter Lynch (in his book One Up On Wall Street) states it is preferable to purchase a business at a higher P/E that grows earnings at a higher rate than a lower P/E business that grows earnings at a slower rate.

However the example, as presented in the linked ticonline article (an excellent site by the way), does not demonstrate full [or any] understanding of the issue. Naturally the 15% grower would outperform the 10% grower if the p/e doesn't change! The very reason for buying a low p/e stock is the value investor's expectation that the p/e will rise as the value of the stock is discovered. And the danger of a high growth, high p/e stock is that the p/e cannot be sustained over time.

Let me adjust the example. Let's say the fast grower starts with a p/e of 25 and ends up with a p/e of 20 ten years later. And the low p/e stock starts with a p/e of 8 and ends with a p/e of 12. The 4.05 performance of the fast grower would be cut to 3.24. And the 2.59 performance of the low p/e stock would be boosted to 3.89. In this example, the low p/e stock would outperform the faster grower.

That said, if you can get a high enough sustained growth rate, the faster grower will outperform even with a shrinking p/e ratio. Lynch's actual example is located in the "Some Famous Numbers" chapter, in the section called "Growth Rate". He compares a 20% grower to a 10% grower. The 20% grower handily outperforms the 10% grower even if the p/e shrinks from 20 to 15.

In any case, this interplay between the growth rate and the multiple (p/e here) is at the heart behind the bulk of my investment decisions. The performance of any investment is a function of both growth and value.