(MONEY Magazine) – If war erupts in the Mideast -- and triggers a barrage of sell orders on Wall Street -- among the last to run for cover will be Sir John Templeton, 78, the Tennessee-born Rhodes scholar knighted by Britain's Queen Elizabeth in 1987 for service to philanthropy. War has been rewarding in the past for Templeton, the perennially upbeat Norman Vincent Peale of global investing. As German tanks rolled over Poland in 1939, he put $10,000 in 104 stocks selling for $1 or less. ''I quadrupled my money when I sold them an average of four years later,'' recalls Templeton from the Bahamian headquarters of his $15 billion investment company. While Templeton's renown as a strategist has slipped along with his mutual funds in recent years, he still commands 69 funds marketed worldwide. (Five of his open-ended funds in the U.S. are included in MONEY's fund rankings beginning on page 118.) For example, his flagship Templeton Growth has trailed the global fund fleet over the past five years for reasons that he explains at left. Yet the $2 billion fund's long-term performance remains five star -- up 59-fold since its 1954 launch, vs. a sevenfold gain for the Dow Jones industrial average. In an interview with writer Junius Ellis, Templeton talked about where he's deploying his shareholders' money -- and his own -- now. Q. If war breaks out, what would you do? A. It would depend on how high stock prices were before the war -- and whether there was panic selling in the first days of the conflict, as is usually the case. In general, wars have been favorable times for buying stocks as opposed to sitting on cash, which loses even more purchasing power to inflation during wartime. Q. What would you do if the U.S. managed to avoid war? A. I would be more inclined to buy long-term bonds. Bond prices would likely rise in anticipation of lower oil prices, inflation and long-term interest rates, which could fall as much as two percentage points over the next three years. These trends would be equally positive for stocks. The major exception would be oil stocks, where I would probably take profits. Q. Are you saying that most stock prices fully reflect investors' mounting fears of war and recession? A. My best guess is that the economic downturn began last year. But the market doesn't discount the same worry twice. Common sense tells us that when pessimism is increasing, share prices will decline. The next major upturn will begin on the day of maximum pessimism. Q. Is that day near? A. I think the odds are about even that it's already behind us. Over my 50- year career, I can't recall any month when stock market pessimism was heavier worldwide than last October, which may well have marked the bottom for small growth stocks, a group that abounds with bargains, both in America and abroad. I'm less optimistic that we've seen the low for U.S. blue chips, which are not particularly cheap or attractive in my view. Q. What have you sold to make room for small companies? A. Big-name stocks that are close to being fully priced relative to their growth prospects. In the U.S., these include Arco Chemical, Boeing, Ford, K Mart and Reynolds Metals. Much of the proceeds has been invested in small companies. Q. What traits do you value most in small growth stocks? A. Low prices and high growth rates. The companies we are buying are increasing their earnings at least twice as fast as the U.S. average of about 7% annually, yet they are priced below the market's recent multiples of profits and book value. An example is Olsten Corp. (lately $12 on the American Stock Exchange), one of the most dynamic firms in the temporary-help field. Profits over the past five years are up 31% annually on sales of about $630 million in 1990. Yet Olsten's market value is only $186 million, or about 12 times reported earnings vs. 14 for the average stock. Q. Where else besides America are you finding such bargains? A. Primarily in Australia, Britain, Hong Kong and New Zealand. These five English-speaking markets, led by the U.S., account for most of the world's small growth stocks and the lion's share of our global stock portfolios. They also employ most of the world's securities analysts, which I believe helped these markets avoid the excessive optimism that prevailed only a year ago in Japan and other countries with runaway bull markets. Q. Are you placing big bets on other stock groups as well? A. Our largest holdings are in out-of-favor banking, insurance and financial services stocks. The unfavorable publicity about banks' problems with bad loans has unduly depressed the stock prices of many perfectly sound and conservatively managed institutions. Examples include Republic New York (recently $49 on the New York Stock Exchange) and Britain's National Westminster (its NYSE-listed American Depositary Receipt recently traded at $30). It's a similar story with insurers like American International Group (NYSE, $77), a global company that's an outstanding bargain. I'm also bullish on Merrill Lynch (NYSE, $21), whose conservatively stated book value is 44% higher than its market value. Better yet, Merrill Lynch has many assets not listed on its balance sheets. For example, it manages $100 billion in mutual funds, which should command a price of about 1.5% of assets under management. That's $1.5 billion, or roughly $14 a share, just for the funds. Q. If you couldn't own stock in Templeton funds, whose shares would you buy for yourself? A. I'll pass on that question. But I will identify my three largest personal holdings in Templeton funds. Heading the list is Templeton World, where my shares were recently worth $19 million, followed by $2.6 million in Templeton Growth and $1 million in Templeton Smaller Companies Growth. Q. Your company, Templeton Galbraith Hansberger, went public in London in 1985. Has it been a good investment? A. Surprisingly, no. Recently at $3.40, the stock is up only 10% in five years, reflecting the depressed state of financial shares. Q. Are you buying back shares? A. British companies can't do that. But among the stock's biggest purchasers recently have been company executives including, of course, myself.

BOX: ''My funds don't lag for long''

In the five years to 1991, global funds gained an average of 74% -- more than John Templeton's two most popular U.S. stock funds. His $4 billion Templeton World was up only 51%, and $2 billion Templeton Growth climbed 72%. His explanation: ''We underperformed mainly because both funds invested heavily in undervalued U.S. stocks and avoided overvalued markets in Japan and Europe, as we still do. It's worth noting, however, that Templeton Growth has had subpar performance in only seven of its 36 years in business. In each instance, the following year was unusually favorable for shareholders. The most recent example was 1987, when the fund gained just 3%. The next year we were up 24%.''