Share Buffett's Success With Tesco

Warren Buffett is a legend of investing, and it's impossible to seriously argue with his success -- a $40 billion personal fortune, plus an investment company that has produced annual gains of close to 20% for more than 40 years, making its shareholders very happy.

So how did he do it? By buying great companies at reasonable prices.

What makes a company great?
There are a number of factors that Buffett, the CEO of Berkshire Hathaway (NYS: BRK.A) (NYS: BRK.B) , looks for in a business before buying, such as a strong brand identity (usually associated with a dominant market position), together with consistent or growing profit margins and high returns on capital -- all of which can give a company a huge "economic moat" to protect it from competitors.

On top of that, Buffett looks to buy such companies at a significant discount to their real value -- companies that, for whatever reason, the market doesn't currently love, but whose true value will eventually be reflected in their share price.

As Benjamin Graham, Buffett's early mentor, famously wrote: "In the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine."

In the end, it's the weight that counts.

Buy what you understand
Buffett also prefers to buy businesses he understands -- companies such as retailers, banks, and manufacturers. He's notorious for shunning the tech sector, with the notable exception of IBM, whose clear business strategy impresses Buffett and prompted a recent $10 billion investment.

True, this meant Buffett missed out on the chance to make loads of money in the dot-com boom of the late '90s. But it also meant he avoided losing money when the bubble burst in March of 2000.

Buffett also likes companies that pay a reliable dividend. Buffett may only be on a modest salary -- spectacularly modest, as CEO salaries go -- of $100,000, but last year that was supplemented by about $60 million in dividends from his personal share portfolio.

Buffett's approach to investing has led him to buy into high-quality companies such as Coca-Cola (NYS: KO) , American Express, Procter & Gamble, and Wal-Mart (NYS: WMT) . Better still, he bought them at what he believed to be bargain prices.

So why Tesco?
Warren Buffett rarely invests outside of the U.S., so when he chooses to buy into a U.K. company, it's time to take notice.

As part of Buffett's holdings, Tesco (OTC: TSCDY) -- of which the billionaire now owns a little more than 5% -- is keeping company with some illustrious stocks. Is the U.K. supermarket up to that challenge?

Buffet obviously thinks so. Even allowing for the slight fall in yearly sales, Tesco still dominates the British supermarket sector. And the group's international diversification is providing support during the U.K. economic downturn -- now officially a double-dip recession.

Tesco's group profit is still increasing (up 1.3%), as are its earnings per share (up 7%), cash flow (increased 4%), and dividend, which was raised to 14.76 pence per share -- a healthy yield of 4.6% at 322 pence. In other words, Tesco firmly ticks lots of Buffett's boxes.

Exactly the right time to buy
Despite all of that positive news, the market has fallen out of love with Tesco -- including, notably, City super-investor Neil Woodford, who has sold all of his funds' holdings in the company. As result, Tesco's shares are now trading about 20% lower than they were this time last year.

If you believe Warren Buffett, now may be exactly the right time to buy.

To learn more about Buffett's decision to buy Tesco, this free report -- "The One UK Share That Warren Buffett Loves" -- includes further analysis and reveals the price he paid.

Investing is by no means easy in today's uncertain economy. That's why we've published "Top Sectors for 2012" -- our guide to three favorable industries. This free report will be dispatched immediately to your inbox.

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At the time thisarticle was published Both Jon and The Motley Fool own shares in Tesco. The Motley Fool owns shares of Berkshire Hathaway and Coca-Cola.Motley Fool newsletter serviceshave recommended buying shares of Tesco, Berkshire Hathaway, and Coca-Cola.Motley Fool newsletter serviceshave recommended creating a diagonal call position in Wal-Mart Stores. The Motley Fool has adisclosure policy.
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