The world's third-richest man has eyes for only one UK business.
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 well over 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 looks for in a business before buying, such as a very 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 (NYSE: IBM.US), whose clear business strategy he really likes and prompted a recent $10 billion investment!
True, this meant Buffett missed out on potentially making lots of money in the dotcom boom of the late 90s. But it also meant he avoided losing lots of money when the bubble burst in March 2000.
And he really 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 to him buying into high-quality companies such as Coca-Cola (NYSE: KO.US), American Express (NYSE: AXP.US), Procter & Gamble (NYSE: PG.US) and Wal-Mart (NYSE: WMT.US). Better still, he bought them at what he believed to be bargain prices.
So why Tesco?
Warren Buffett rarely invests outside of the US, so when he chooses to buy into a UK company, it's definitely time to take notice.
As part of Buffett's holdings, Tesco (LSE: TSCO) -- of which the billionaire now owns just over 5% -- is keeping company with some very illustrious stocks. Is the UK 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 UK 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 its dividend, which was raised to 14.76p per share -- supporting a healthy yield of 4.6% at 322p. 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, 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 year.
Which, if you believe Warren Buffett, 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 Of 2012" -- our guide to three favourable industries. This free report will be dispatched immediately to your inbox.
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Both Jon and The Motley Fool own shares in Tesco.
