Wall Street's top firms jostle to hire from this college class. The fact it teaches Warren Buffett-style valuation helps explain why.

Warren Buffett.

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• Wall Street's top firms often hire from a specific college class.
• Steve Hanke of Johns Hopkins teaches students how to value companies using a Buffett-style approach.
• They build cash-flow models, run simulations, and analyze financial reports and executive pay.

Wall Street's top firms jostle to hire from a specific college class. The professor's emphasis on teaching his students how to value companies like Warren Buffett helps explain why.

Steve Hanke has taught "Applied Economics & Finance" at Johns Hopkins for more than 20 years. He handpicks the students for his class, and they virtually all score job offers from top-flight banks and hedge funds once they graduate.

Hanke has been a Johns Hopkins professor and currency and commodity trader for half a century. The veteran economist is a former adviser to President Ronald Reagan, and was president of Toronto Trust Argentina in Buenos Aires in 1995, when it was the world's best performing mutual fund.

In his signature class, students first learn to build discounted cash flow models from scratch using companies' annual and quarterly reports. Next, they're taught to run "Monte Carlo" simulations to generate potential scenarios, which allows them to determine the likely price range for a company's stock, and gauge the probabilities of its shares rising or falling.

Hanke's students also examine the market's expectations for a stock based on its current price, analyze companies' returns on capital, and critique how their bosses are paid. They consider everything from capital allocation and debt levels to stock issuance, dealmaking, and shareholder returns. They refine their models over several weeks based on feedback and further research, and have to defend an investment thesis to the class, helping prepare them to work as analysts.

Buffett, the CEO of Berkshire Hathaway, takes a similar approach to valuing a business. He pores over its financials, tries to predict what it will look like in 10 years' time, and judges the quality and compensation of its management.

"It follows very much in the Buffett line of thinking about investing in companies," Hanke told Insider about his course. He described building a cash flow model as "very Buffett-ish," and said it's "clear to me that Buffett goes through the same type of Monte Carlo simulation in his head."

Buffett looms large in the suggested reading list for Hanke's course too. It includes "Poor Charlie's Almanack" — a collection of wisdom from Buffett's business partner, Charlie Munger — and "The Intelligent Investor" by Benjamin Graham, Buffett's late professor and mentor. It also features a recommendation for students to read Buffett's partnership letters.

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Hanke makes a point of sharing many of Buffett's key teachings with his students. In an email to Insider, he listed several of the investing icon's lessons based on "Warren Buffett Speaks: Wit and Wisdom from the World's Greatest Investor" by Janet Lowe, and voiced his views on them. Here are some of the key ones:

1. Be smart about allocating capital — "I put great stress on how students should analyze the decisions surrounding the allocation of capital. That's the name of the game."

2. Listen for opportunity's call  — "When Mr. Market throws up a price well below a firm's intrinsic value, pounce."

3. Earnings, earnings earnings — "I would add: Free cash flow, free cash flow, free cash flow."

4. Avoid risk, don't gamble — "That's why I link Monte Carlo simulations to my discounted free cashflow models. It allows you to take a look at the probabilities and to stack the odds in your favor."

5. Avoid excessive debt — "There is nothing more important than a sound balance sheet."

6. Be patient — "I have learned to wait a very long time to make a move, often years." 

7. Be wary of Wall Street — "95% of what Wall Street's chattering class has to say is either wrong or irrelevant."

8. Don't sweat the math — "Forget the complicated algorithms. Learn how to read balance sheets and annual reports."

9. Admire frugality — "Avoid spendthrifts and showboats. Work horses and war horses always beat show horses."  

10. Stick with quality — "Stick with quality people and companies and you won't go wrong."

11. Don't worry about diversification — "If you know what you are doing, it's best to place big bets on a few investments that you know well and that have promise of outperforming."

Whether they're digging into a company's fundamentals, judging executive compensation, or exercising prudence and discipline, Hanke's students clearly take a Buffett-style approach to valuation. That likely serves them well when they're vying for a coveted job on Wall Street.

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